The US Federal Reserve Bank’s efforts to restore liquidity to financial markets and reassure depositaries about the cost and availability of funding in the wake of the sub-prime mortgage market crisis should prove successful in the long-term if previous debt crises are anything to go by, according to PerennialInvestment Partners.
In a report to investors, Perennial stated that although two cycles of the market are never identical, parallels can be drawn between the Fed’s handling of the 1998 Russian debt crisis and this year’s sub-prime mortgage market crisis.
In 1998, Russia defaulted on its bond obligations in mid-August, appetite for risk quickly dried up and equity markets were put under extreme pressure. The Fed eased for the first time on September 29 of that year, which helped put a floor on equity markets, but it was only after inter-period easing on October 15 that risk appetite began to normalise. The Fed eased by 75 basis points in total and by June 30, 1999, with a crisis averted and growth back on track, it unwound the emergency easings of the previous year.
This time around, in response to massive debt in the US sub-prime mortgage market, the Fed moved to an easing bias on August 17 and cut its primary credit rate 50 basis points to 5.75 per cent. This will remain in place until the Fed determines market liquidity has improved materially.
Perennial predicts that, if further steps were required to avert the crisis, the Fed would follow through.
Perennial warned investors to be prepared for more volatility and negative returns in the short term, but its long-term forecast is essentially fine.
“The global environment for quality companies and property securities looks sound and we expect markets to rebound from these levels.”
Perennial stated that, prior to the sub-prime crisis, investment fundamentals for global equities and property securities were solid. It pointed to strong and diversified world growth, companies reporting solid earnings growth, rental incomes around the world increasing and strong economies driving robust returns in shopping centres, office and warehouse property trusts.
