A severe recession is much easier to deal with than a financial panic. It’s even easier when investors have almost stopped worrying about the recession.
Evidence of this economic truth abounded on Friday. Two stretched UK companies, private equity investor 3i and housebuilder Taylor Wimpey, were able to snatch up £1.2bn in equity deals. In both cases, the sums raised were at the very top end of the mooted ranges and the bankers murmured that some investors had an appetite for more.
Investors seem to believe 3i will find attractive investments when times get better, and Taylor Wimpey can get though the UK housing collapse. Trust is in the air. The Thursday announcement that US banks need to find $75bn of new capital by June hardly caused a ripple. Around the world, the three-month old stock-market rally continued.
Other capital-needy banks in Europe will take heart. So will shareholders of Rio Tinto. The Anglo-Australian miner’s share price is now high enough to let it renegotiate more favourable terms on a controversial deal with the Chinese Chinalco. Indeed, the beneficiaries of rising markets are almost everywhere: from pension funds with less dire deficits perhaps even to financiers expecting higher bonuses. Are things back to normal already, only eight months after the collapse of Lehman Brothers provoked a global financial crisis and economic decline of almost unprecedented severity?
Maybe things are normalising. But you don’t have to be a prophet of financial Armageddon to worry that the market rally might be cut short before all corporate balance sheets can be righted. First, there’s the recession. The pace of decline has slowed, but production is still falling in most of the developed world.
Even if GDP soon stabilises at current levels, companies and lenders will have substantial losses to absorb. Then there’s the ample supply of government money, the prime fuel for the fiery markets. Huge fiscal deficits and generous central banks are welcome now, but they are likely to come with a cost later – inflation, higher taxes or just higher interest rates. Investors and issuers should enjoy the good markets while they can.
