Investors offloading expensive sectors
22 August 2008

Written by Sophie Baker

Investors are reacting to the slowing global economy by selling sectors which had previously prospered but are now expensive in relation to their history, says Andrew Capon, vice president at State Street Global Markets.

Following news that European investor confidence has fallen by three points, Capon told European Pensions that these sectors which prospered most from boom years, in particular Materials and Energy, are being replaced by investments in sectors that look “historically cheap”, including Health Care.

“Back in the early summer investors were selling bonds because of fears over inflation. Now, with global growth the biggest concern and interest rate expectations being revised downwards they are buying government bonds again,” Capon said.

The August 2008 results from State Street also showed Asian investor confidence as having raised by 3.6 points, and Capon attributes this to Asia’s remoteness from the credit crunch.

“After many years in an ailing condition the Japanese banking system, for example, now looks relatively healthy compared to the west. Growth, though being revised down in the region remains healthy compared to the euro area and the US,” he said. Japan, however, was again an exception as it contracted in the second quarter.

Capon is not surprised that North American investor confidence has continued to fall, between July and August 2008 by 8.1 points. But is there an end in sight for this spiralling confidence?

“Even if the worst is over for the financial sector the second order effects of the credit crunch in the real economy are only just beginning to be felt. The transmission mechanism for these problems is lending standard. The latest Senior Loan Officers Survey from the US Federal Reserve shows a tightening of lending standards across the board, but particularly for consumer loans and credit cards,” commented Capon.

However, Capon warned that should consumers be constrained in terms of their ability to attain credit, it is likely that consumption will fall, having a direct and negative impact on growth and earnings of American and overseas corporations.

Capon concluded: “The credit crunch was born in the USA. Its effects continue to be felt there most keenly.”