Turning the corner?

22 May 2008

After the nervousness of March, investors seemed to regain some courage in April, as share prices rose across the board. This all came in the face of yet more bad news from the banking sector but, at the same time, there seemed to be a feeling abroad that the worst was finally over.

Write-downs continue to be the order of the day for household names in international finance. Most notable was Credit Suisse, which followed in the footsteps of UBS with a CHF 5.3 billion ($ 5.3 billion) write-down in the first quarter.

Elsewhere in the sector there were rights issues, as banks sold new shares to shore-up their capital positions. Among these was the largest rights issue in UK history, when RBS sold £ 12 billion ($ 24 billion) of new shares to cover the cost of write-downs and help pay for last year's £ 56 billion ($ 112 billion) acquisition of Dutch bank ABN Amro.

Despite these difficult pieces of news in the banking sector, share prices generally rose during April.

Strongest of all was the beleaguered Nikkei 225, which was up 13.07% between weeks 12 and 17. Over the same period the UK's FTSE 100 gained 10.72%, while the Dow was up 6.19%. Manufacturers in the lifting sector found themselves somewhere between the extremes, with IC's Share Index putting on a 9.73% gain, to finish week 17 at 549.82 points.

Double-digit gains were generally the order of the day, with up beat first quarter results from the likes of Terex and, outside the lifting sector, Caterpillar, boosting confidence in the heavy equipment industry in general.

Manitowoc's results were also strong but, away from the crane sector, its share price was impacted by the announcement that its food service business had agreed to buy UK company Enodis for £955 million ($1.88 billion). A 70% premium on Enodis share price the day before the announcement, the bid looked a little generous, especially considering that Manitowoc had ditched a 15% lower takeover offer for the company last year. These concerns clearly weighed on the Manitowoc share price.

Currencies

Despite gains against the Yen and Pound during April, the Dollar still looks as weak as ever. Towards the end of the month it dipped below € 1.60 for the first time ever. It was not so long ago – early 2002 – that the Dollar was valued around the € 0.85 mark, and it is incredible to think the most widely used currency in the world has nearly halved in value in six years.

In just the last 12 months the Dollar's slide has been huge. Although it is flat against the Pound – the UK has a big public sector deficit and falling interest rates too – it has lost about 13% against both the Yen and Euro.

Outlook

Despite a steady stream of write-downs and other bad news from the world's major banks, the stock markets seem to have become fairly immune to the sector's woes. This would seem to imply that investors think the worst of the credit squeeze is now in the past and, if this proves to be the case, share prices should continue to creep up.

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