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Robert Talbut, RLAM’s CIO, warns the credit crisis is not over yet and is still evolving

At a keynote briefing for investors held in London at the end of April, Royal London Asset Management's (RLAM) Chief Investment Officer, Robert Talbut highlighted the macroeconomic context for current market conditions.

  • The credit crisis is not yet over but the focus is shifting. Recent rallies in equities and credit have provided "sighs of relief" but it is wrong to think that this period is fully played out. He warned that economic consequences are only now starting to materialise as the restricted availability of credit starts to bite. There will be a sharp economic slowdown with the UK particularly badly exposed, due to over leveraged consumers, over priced housing, a constrained fiscal position and sticky inflation.
  • Deleveraging both in financial markets and the real economy will be the dominant force for an extended period as balance sheets are repaired.
  • The crisis resulted from a mispricing of real risk throughout the system, irresponsible lending and borrowing and a move towards increasingly opaque and complex products.
  • Housing prices will continue to fall, probably double digit percentage decreases this year and into 2009.
  • Banks will need to raise further capital. Strong banks are a precondition for emerging from this period. However, the announcements by RBS and HBOS are just the start, and we can anticipate more fund raisings and writedowns to come.
  • Further actions will be necessary in order for us to emerge from this episode. Interest rates will need to be cut globally, as the availability of credit declines. There needs to be greater regulatory cooperation and coordination and we should expect to see further intervention from central banks buying impaired assets.

Summing up he said: "The true credit crisis kicked in last autumn 2007 and is starting to bite now with the consumer feeling the pain and the real economy hurting. The financial crisis is likely to impact market structure and pricing for at least a decade. I would envisage that there will be a greater demand for products with simplicity and transparency, capable of meeting the 'Ronseal' test - vanilla will become sexy".

In his own address, Jonathan Platt, Head of Fixed Interest at RLAM, examined the importance of credit to a fully functioning economy, explored the changing landscape for credit markets and looked ahead to new opportunities for credit investors.

  • Credit is a vital part of an efficient economy. In the UK alone, the credit market is valued at £0.5 trillion, playing a crucial role in the smooth operation of many other financial sectors. He outlined three key reasons for the current malaise in credit markets which has in turn led to a collapse in confidence in the financial system:

     o US housing slump – now a national phenomenon as opposed to previous regional downturns. This has been triggered by over leveraging, bad products and in some cases, fraud.

o Global banking writedowns – too many risks were taken without fully appreciating the consequences.

o Collapse in confidence in the monoline insurers – downgrades of "AAA" rated securities which turned out to be far less creditworthy.

  • Traditionally the credit market served to supply capital to the corporate sector; this is now changing to focus on providing financing for the housing market, infrastructure projects and PFI. Increasingly, credit is being used as a means of transferring risk via securitisation.
  • In discussing the role of Asset Backed Securities (ABS), Jonathan sought to demystify the confusion around these bonds, highlighting the significant buying opportunities that are now on offer in some ABS. With a ring fenced pool of assets acting as collateral and covenants in place to ensure the assets remain unchanged, the low default rates and high recovery levels associated with ABS are proving attractive to investors who truly understand the risk profiles of the traches of debt they are investing in.
  • Unrated bonds have an important role to play in a well diversified bond portfolio, often with attractive risk/return profiles relative to similar rated bonds.

Jonathan Platt concluded: "Credit remains a key asset class for the UK economy and investors, despite the upheaval in corporate bond markets since the middle of 2007. The credit landscape is evolving and we believe there are some great opportunities now on offer for medium term investors. Whilst we anticipate increased idiosyncratic risk for individual issuers, we see significant benefits in investing in a diversified portfolio of corporate bonds."

- ENDS -

 

Other speakers were:

  • Robert Gardner, Partner at Redington Partners LLP whose theme was "Understanding and managing risk within pensions and investments"
  • Christian Dinwoodie, Head of Corporate Ratings, Standard & Poor's who presented on the role of the ratings agency and new measures to strengthen governance analytics, transparency and investor relations. 

For further information:

RLAM
Stephen Watchorn
Tel: 020 7506 6582
Stephen.watchorn@rlam.co.uk

Quill Communications
Jo Stonier
Tel: 020 7758 2230
Jo.s@quillcommunicate.com

Editor's notes:

Royal London Asset Management (RLAM)

was established in 1988 and specialises in providing investment management solutions for both the Royal London Group and a range of external institutions. These include FTSE 250 companies, local authorities, universities, charities, wealth managers, financial advisers and private clients. RLAM manages over £31bn of assets, employing more than 50 experienced investment professionals in our London based office.

Royal London Group

is a specialist financial service provider. Its businesses focus on those sectors of the market which value premium propositions, operating through a number of brands:

  • Scottish Life – UK pensions market
  • Bright Grey – UK protection market
  • Scottish Life International – offshore investment markets
  • RLAM – fund management
  • RLAS – life and pensions administration
  • Fundsdirect / Ascentric – funds supermarket; Wrap Platform

Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £33.1 billion. Group businesses serve around three million customers and employ 2,620 people. (Figures quoted are as at 31 December 2007).