AT THE start of the year, markets ran away screaming when faced with the mountain of refinancing required by banks and industrial companies to see them through the downturn.
The depth of the recession was unfathomed, the holes in balance sheets had only just begun to be disclosed and the height of the mountain was such that investors’ knees wobbled.
In the months since, some of the mists have cleared and the central banks have administered the equivalent of plasters, Kendal mint cake and oxygen. This has encouraged some intrepid climbers to venture on to the lower slopes, where the corporate sector has decked out its stalls, seeking to raise the capital they need to survive and prosper.
There is no great surprise about how many companies are seeking capital, particularly given the caution being displayed (amidst the sound of crashing stable doors) by the banks’ lending officers.
While the size of the mountain was expected, what is more encouraging is the number of climbers. Record amounts are being raised in the corporate bond and equity markets and, although the institutions are clearly being selective over who will be financed (no takers for the US car makers, for example) some of the cash set aside in the more nervous conditions of 2007-08 is now being invested.
The Bank of England’s quantitative easing programme is helping, boosting the money supply by directly purchasing lower risk assets from the private sector.
No doubt, the shift has also been encouraged by the paltry interest rates available on cash deposits and government bonds – no food is being served at base camp so if you want to eat you must climb the slope.
Although progress is being made, I cannot help wondering whether the summit in view is the top of the mountain or will, once it is reached, simply reveal a higher peak beyond. As the Bank of England’s governor recently observed, there is a difference between giving the banks enough capital to survive and giving them enough to return to normal levels of risk aversion (code for “willingness to lend”).
However, at the end of last year, the lack of will to back any new issues meant that corporate distress became worse, threatening to create a downward spiral in the economy. Now that the business of refinancing has begun, the more nightmarish downside possibilities for economies have receded.
As a result, it is possible to envisage a more positive feedback loop where the more refinancing is achieved, the fewer corporate walking wounded there are, improving economic confidence and making subsequent capital-raising appear less risky than the earlier rounds.
So, a process of convalescence is under way, which is a relief compared with earlier fears but should not be confused with a return to full health. Although there are fears that a prolonged period of low interest rates will lead to high rates of inflation, these risks are longer-term rather than immediate. Meanwhile, the ongoing need to rebuild savings in the economy without suffering prolonged recession means that interest rates are likely to be kept low for some years, posing the same dilemma for individual investors as for institutions – how to secure an adequate investment return without insomnia-inducing levels of volatility.
Key ingredients in this are diversification, attention to quality (of management, business franchise and balance sheet) and patience (though this is easier said than done after the ructions of the past year).
ANDREW BELL,
Head of Research,
Rensburg Sheppards
