Have we seen the worst? That’s the question bankers, issuers and investors are asking after the spectacular recoveries in several emerging stock markets and the reopening of various sectors of the bond and equity markets.
In emerging markets, equity indices have regained much of the ground lost since the beginning of the year. Even where investors are still concerned – for example in Brazil – equity markets have stabilized. The panic that has characterized emerging market investment is slowly subsiding and a number of US money managers are now launching new emerging-market funds to take advantage of low prices.
More generally, the blind stampede into only the safest-haven paper seems to have subsided. Bond market commentators have been pointing out for some time that if investors keep shunning spread paper then we are simply swapping one asset price bubble for another. Buyers have heeded the warnings and profit takers have cashed out. Treasury yields now look more sensible.
In Europe, NTL reopened the high-yield market – true most of the buyers were US-based and, also true, the company paid nearly 300 basis points more this time than it did just months earlier, but for a market that even its greatest proponents were saying would be closed for months this is good news. There is optimism too in the equity markets. Conoco’s $4.4 billion IPO – the US’s largest ever – lead-managed by Morgan Stanley Dean Witter was a resounding success that reopened the US new issue market.
There are other reasons for optimism. The major economies seem to have agreed on a multi-billion dollar bail-out mechanism and have reaffirmed their support of the IMF’s central role in rescues. The US Congress has approved additional IMF funding. The Japanese are discussing guaranteeing the issues of their Asian neighbours and Japanese banks are finally taking their weakness seriously. Those unable to meet the BIS requirements will give up the struggle and shut down foreign operations. The larger players too are at last facing up to the realities of their predicament. The news that Dai-Ichi Kangyo and Fuji Bank are considering a strategic alliance that would also rescue troubled Yasuda Trust and Banking is the first step in the long-overdue process of reforming the sector.
So, while Peter Lee’s piece is right to focus on the difficult measures banks must take to maintain earnings, the sky hasn’t fallen in yet.
