August 27th, 2007 - Archived Economic Forecast
Investment Policy Committee Newsletter
The Sub Prime market which makes up an estimated 15% of the total 10 Trillion dollar US mortgage market is now the driving force behind the volatility in markets. We feel that the structured credit market (Collateralized Debt Obligations, Asset Backed Debt, etc) will come under further pressure as large insurance companies, banks and other financial institutions are forced to price their securities using a market price rather than a model price. The lack of liquidity in the market will cause significant differences to emerge between these two prices and will put further downward pressure on the valuation of these bonds.
- As a result we are continuing to recommend that clients reduce exposure to mortgage related bonds in favor of government issued bonds.
The recent liquidity crisis in the US has caused the institutional cost of borrowing to rise by roughly 0.50%. We feel that the US Federal Reserve will acknowledge this and cut the Fed Target Rate to 4.75% on September 18th. We feel this “re-pricing” of the credit market will allow the Bank to cut rates without completely abandoning their inflationary targeting position as stated after their July meeting.
The recent increase in hedge fund redemptions coupled with stricter borrowing terms from bankers is putting pressure on many hedge funds to dramatically reduce their leverage. As a result, many funds may find themselves underperforming as they realign to comply with these new conditions. We expect this will continue to add to market volatility over the next few months.
- We are recommending our clients delay new investment in hedge funds, until funds have covered current redemptions.
- We have reduced our target exposure by 1.5% to 13.5% of our balanced portfolio.
| Asset Class | Geographic Focus | Currencies | |||
|---|---|---|---|---|---|
| Equities | 45.0% | North America | 46.8% | US Dollar | 44% |
| Bonds | 35.0% | Europe (ex-UK) | 24.0% | Euro Bloc | 34% |
| Hedge Fund | 13.5% | United Kingdom | 10.0% | UK Sterling | 6% |
| Cash | 2.5% | Japan | 8.0% | JPN Yen | 12% |
| Commodities | 4.0% | Pacific (ex-Japan) | 5.4% | Swiss Francs | 2% |
| Emerging | 5.8% | Dollar Bloc | 2% | ||
These recommendations are targets and do not represent specific trade ideas. Not suitable for all investors. For further information call LOM Asset Management Limited or your local Relationship Manager.
