It’s not over yet

It may be too soon to call an end to the credit crisis on the back of improving markets, according to one boutique fund manager.

Ashton Advisers head of Asian operations Nick Raphaely said despite investors hailing an end to the credit crisis with global markets rebounding strongly in April, it might be still too early to call.

“Such luminaries as Morgan Stanley’s John Mack and Goldman Sachs’ Lloyd Blankfein have declared that we are closer to the end than the beginning of the crisis,” he said.

“There is a tendency in life to believe that ‘everything will always work out because it always does’. Markets exacerbate this optimism by being long biased and yearning for good news. Hope, however, is not a good investment strategy.”

Ashton believes that daunting solvency problems loom in the coming months, with write-offs still to be realised in the global financial industry. These are so large that there may not be enough money available to recapitalise the banking system.

According to Raphaely, it will take time for people to admit the changing realities and adjust their behaviour accordingly.

“We will see a return to the basics of lending/financial intermediation and a clear move away from the massive levels of ratings-based leverage and exotic financial engineering,” Raphaely said.

“People who have been binging on debt over the past few years will realise that having three family cars, multiple holidays and a plasma TV in every room is not financially sustainable.

“But it is not all doom and gloom. The credit crunch will prove to be a cure by liquidating the excesses that never should have been. But this transition, as is true of many cures, will take time and will be painful to live through.”