From the resolute equity markets of only a year ago, all the confidence and enthusiasm seems to have been totally dissolved. Equity portfolios that were supposed to be wonderful manifestations of structured investment construction seem to have been reduced to a pile of broker’s apologies. For those who had already diversified away from equities then at least some of the damage will have been mitigated – and for those who have been building up their cash reserves then there will come a valuable moment when they will be able to buy equities again – but at a far better price. However for the moment, with the seemingly continuous belts of weather fronts bringing in more rain bands from the Atlantic, our equity markets will continue with their somewhat depressing meteorological behaviour for the time being.

“Pride before a fall” should be carved over the doorways of Citigroup and Merrill Lynch. When comparing their statements of confidence and complacency of a year ago with their current situation, then possibly a level of contrition should be more appropriate now. The air of complacency that was prevalent at that time was reflected in the amount of extra risk that was being taken on, and by my colleague Ros Price’s decision to “de risk” her portfolios at that time can now certainly be seen as a wise and prescient move.

For Citigroup and Merrill’s however, their fall from grace has proven painful and the financial support from around the globe has begun to look more like a begging bowl being passed around rather than a call to confident investors. As well as Middle Eastern funds being sucked in, Korean and Singaporean money has also been tapped. However, another source has also been located, much to the Americans bankers’ delight – and possibly surprise.

After nearly a decade and a half of national confinement, the reformed and reorganised “mega banks” of Japan may finally be ready to expand beyond their shores again. The Japanese banking system went through an appalling systemic crisis in the nineties and only in the current decade have we started to see some return to confidence.

Many of the old Japanese banking names were lost as their imminent failure was masked by government “encouraged” mergers. However, from their very weak position there has been some considerable recovery and they are now looking far healthier and potentially able to start some tentative external investment. The Japanese government had provided state loans for their restructuring and as a result of the recovery in the Japanese economy over the past few years much of this debt has now been repaid. With their reserves now building up, they may now be in a position to expand and try to seek more profitable returns than those currently available domestically. Although nothing to do with these banks it is still worth remembering that Japan has the second largest foreign exchange reserves in the world after China.

The opportunity therefore that the current banking crisis has thrown up for them could certainly lead to further positions being taken in the US (and possibly European) wounded beasts. The big three, Mitsubishi UFJ, Mizuho Financial and Mitsui Sumitomo Financial Group, are thought to have prepared a combined cash pile of around $10 billion and the first move was made last week by Mizuho into Merrill’s.  Watch this space!

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So apparently this has been the worst start to the year for the London market since 1935 when the FTSE 30 Index was first started – this was subsequently replaced as the leading index by the FTSE 100 in 1984. As I write the FTSE 100 is down by over 7.5% (after last year’s rise of 4%). However, to reflect the greater pressure on domestic stocks please note that the FTSE 250 has fallen from 12220 in May 2007 to 9580 – a fall of 22% - a fair predictor of the UK economy that the politicians should take account of!

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And finally………following last week’s revelations of US driving skills, further heartening news of the care that our American cousins take in their cars. It seems that an American in California was injured in a car crash while not wearing a seatbelt – hardly surprising as it seemed that the belt was being worn by the “twelve pack” of beer next to him. It is important to get your priorities right.

Have a good week,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited