Markets
Grim UK economic data drove government bond yields to a fresh low of 0.95 per cent last week.
Ahead of next week's BOE monetary policy committee meeting, the 2-year gilt was affected by an expectation of at least half a percentage point.
a) UK mortgage approvals in Nov hit 27,000 loans, lowest on record
b) Halifax data showed a 2.2 per cent drop in house prices in December 08
c) Bank of England's credit conditions survey showed that banks were cutting the supply of debt to businesses and consumers
Looking back at 2008,
it was easy to claim that the crisis we've tripped ourselves over was largely a crisis of confidence which is unlikely to untangle easily. The spillover into 2009 would most probably be in the form of more business failures (we have seen Zavvi, Woolworth's and Whittards capitulating in the last weeks of 2008) and higher bad debts (credit card loans, mortgages) from recessionary pressures.
Retail banks in the UK and around the world have been used to low levels of bad debt provisions due to a 10-year bull cycle of rising home values and economic growth, but in this new/weaker business environment, banks would have to act fast to raise equity. For those unable to, they will have to resort to balance sheet deleveraging which directly contradicts the UK government's adopted expanionary policy to increase lending.
Many can now claim that investment revenues were actually driven by unsustainable risk taking and dangerous levels of leverage, and with the shift of power from the trading room to corporate and retail banking, we can safely expect less revenues from M&A advisory and proprietary trading. Maybe investment banks can encroach on the business of advising the sale and restructuring of troubled businesses, but that is already a crowded arena with many specialists.
Therefore in 2009, I can safely predict that banking and financial stocks will still underperform the wider "real" economy, but that's something for next week.
Eric Tan, London
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