Uncertainty about the financial markets fills the air. The fear of a 2008/09-style stock market crash makes me wonder whether I should be buying shares or hunkering down with cases of baked beans and a shotgun to protect me in the lawless post-Brexit apocalypse that is surely on its way!
Investors want their money back
So far though, the crash is more ‘selective easing’ than ‘freefall plummet’. Some sectors have fallen, some are still falling, and some are rising. The latest sector hitting the headlines is commercial property.
Investors certainly seem to be panicking about the post-Brexit environment for the commercial property market. Many want their money back from property funds — so many that the funds can’t cope with the demand and need to sell property first before they can raise the funds to return to investors. Aviva, Standard Life and M&G, all temporarily closed their UK-facing property funds last week, locking-in investors’ money for, well, who knows how long?
Managed retreat?
Yet as the pound plummets and real estate funds seize up, the Bank of England steps up to the plate. Last week the BoE announced a lowering of the amount of capital banks must hold in reserve, thus freeing up an extra £150bn for lending to businesses and individuals.
But will anyone want to borrow when the economic outlook is so uncertain? The BoE reckons the flow of foreign money into commercial property slumped 50% during the first quarter of the year signalling an end to one big driver of property price inflation. Brexit worries weigh heavy, but had the price of commercial property pumped up too high? Many think so, which makes me believe that a managed retreat in property prices could be a good thing, and the way the property funds have put the brakes on the outflow of investors’ money could work to stop an easing in property values turning into a rout.
Naturally, the fear of falling property prices in general has driven down the shares of London-listed housebuilding firms. But I think they ran too far up anyway. Housebuilding is a cyclical industry and when profits are high for the housebuilders, the traditional valuation measures such as price-to-earnings ratios should be low — how else can the market discount the ‘inevitability’ of lower earnings ‘when’ the cycle next turns down?
Pressure release
As long as the pressure keeps blowing out selectively in areas of the economy that need a release — such as inflated property prices now — I reckon a big crash in the style of last decade’s credit crunch seems unlikely. It’s certainly not all doom and gloom on the London stock market because the shares of many internationally-focused firms are doing well as the weaker pound makes foreign earnings more valuable when translated back to sterling.
Overall, I would argue that vulnerable sectors already have weaker shares, and banks are better capitalised, have less unwieldy operations, and are stronger than they were in 2008/09. A major crash of ‘everything’ from here seems unlikely. Brexit jitters will surely pass, so it’s probably worth seeking out pockets of good value in shares representing quality firms then holding on through any more volatility that comes.