Saturday 25th October 2008 - ABC Radio Material
1/ The Mortgage Fund issue.
This issue has become bigger overnight, with more mortgage funds having to stop redemptions. This is very different from the situation with failed mortgage schemes (Westpoint; Fincorp) or failing schemes (eg City Pacific) in that the underlying assets of the funds from where the redemptions are coming (Perpetual/Challenger Howard) are sound - it is just that investors want their money back because they want to deposit this in AAA rated accounts. This seems very rational!
I am happy to say that these funds are nothing like the failed schemes where many loans were to related parties, where the loans were used for risky property construction, where the loans were often second mortgages etc.
2/ What is Happening in Investment Markets?
I think that there are three key issues inpacting on markets at the moment:
Issue 1 - Credit Crisis Fears: Update - there are signs that borrowing rates between financial institutions are coming down. This is a positive sign, although it has taken extreme Government action to bring this about. That said, the signs are positive although it is a long way until we are out of the woods.
Issue 2 - Fear of Recession/Economic Slowdown and Slowing Earnings: This is a key issue weighing on markets. The Australian Government and the RBA have reacted by cutting interest rates 100 basis points and sending pre Christmas funds to targetted people (pensioners/families). The ANZ boss (Smith) said that he expected slowing growth but no recession in their annual results.
Issue 3 - Panic Selling/Forced Selling - it is difficult to make a definative comment on this. There is clearly still fear around - however the improved credit market conditions help. CNN Money report that investors had withdrawn less from USA Share Managed Funds than in recent times, which they report as a reduction in pessimism.
3/ NAB and ANZ Results
Both reported their annual results to the end of September this week.
The interest in these results is that the financial services sector has been the most hit part of the economy in this credit crunch - so how have these big two banks faired?
NAB results were about flat, ANZ's profit fell.
However both these companies remain very profitable through the credit crisis - a sign of how strong our banking sector is.
NAB increased their dividend; ANZ held theirs constant. This remains a reminder to investors that as bad as the price movements of companies are, focussing on the bottom line of income posts a more attractive picture.