A little more than 80 days is all that is left from this year. A year that most small and big investors alike, as well as bankers and brokers, are very eager to put behind. We have seen many breaks with current practice, from complete collapse in faith in American subprime to the failure of big investment banks that were one of the main pillars of economy. We have seen nationalisation and government intervention in USA, which has, with barely concealed pleasure, lecturing Russia (1998), Japan (1990-2000) and others that the capitalism should be let to do its work, and that they should let the markets to cleanse itself of the bad practices. According to their lecture, countries should not intervene as they would only increase the losses. Of course they see things in completely different light if they happen to a neighbour, rather than themselves, especially right before the elections.
We have seen state intervention to save the biggest banks. Currency markets went completely mad and volatility has increased greatly. While in the previous years, we have barely seen a move around 1%, we have, on Tuesday, seen 7% fall of the AUD versus the USD. Stock markets show similar picture. On Tuesday, Brasilian index Bovespa fell 15%, while most of European indices fell around 7%. This clearly shows panic. Investors are so scared, that they are purchasing the safest US government bonds at prices that bring negative real return. Every new information causes wild trading swings.
To calm the situation a bit, FED, ECB and four other central banks have issued a joint statement to lower their respective interest rates by 0,5%. New ECB interest rate is thus 3,75%. All countries are increasing the deposit guarantees. Ireland now guarantees unlimited deposits. In Slovenia, deposits are guaranteed up to the amount of 22.000 Euros per depositor per bank. Financial ministers of the EU have agreed to increase the coverage to at least 50.000 EUR throughout the EU. We can expect an announcement in the coming days. You can find more about Slovenian deposit guarantee scheme at the following URL: http://bsi.si/jamstvo-vlog.asp?MapaId=150
Nobody knows what will happen until the new year. There is a high probability that the credit crunch is going to intensify and panic increase. Almost certainly we will see some more interventions, probably nationalisation of one of the biggest American banks and the transition of most of European financial sector back to state ownership.
Slovenia is a small country, but its banks are part of international economic arena, so they can feel a lack of liquidity and possible state intervention if the crisis intensifies. This goes even more so for the foreign owned banks, dependent on their mothers. While I do not expect any larger collapse of Slovenian bank, I can not say this about Slovenian stock exchange. I expect SBI20 to continue its slide and bottom out at around 3500 points. This will be the right time to buy, as we will be able to buy stocks with large “SALE up to 75% OFF” stickers on them. Whoever buys the shares then, he should see an average annual growth of at least 15% for the following few years.
Most of the experts agree that we have not even reached the half of the crisis. Louder and louder are reports that the oil prices are going to slide under $30 per barrel. Banking sector will come out of the crisis very different and much more regulated. At the moment, the safest bets in Slovenia are government bonds and bank deposit up to the guaranteed amount. Liquidity has a very high value at present and it can happen that the banks will be offering very high guaranteed returns in exchange for long term deposits.
This is an English translation of an article by Mitja Sadar that was published, in Slovenian, in the leading Slovenian Investment Magazine KAPITAL, on 13.10.2008. Original article is available at the following URL: http://www.revijakapital.com/kapital/poslovnefinance.php?idclanka=6101
