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Tuesday, 5 February 2008

Markets will recover after 3-6 mths of mild recession: S&P analyst

He warns of one more major market collapse between now and rosier H2

By VEN SREENIVASAN

THE sub-prime crisis will cause a mild US recession, but financial markets will recover in three to six months after most of the bad news is flushed out or priced in, says a leading US analyst. Stephen Biggar, New York-based director for US equity research at S&P Equity Research, was one of the first to predict the sub-prime crisis and subsequent market meltdown that began in late July last year.

He sees many similarities between the current sub-prime fallout and the 1990-91 Savings and Loan (S&L) crisis. 'The ingredients are the same: banks in trouble, credit crunch, junk bonds, worthless debt,' he said. 'But as is the case now, the Federal Reserve stepped in aggressively.

The US went into a mild recession, but it was a three- to five-month event for the market.' Mr Biggar reckons this US recession started in December 2007, but noted that the Fed has moved fast, cutting its key interest rate three times in as many months - the most aggressive cuts in 25 years. The latest 50 basis points cut last week brought the key discount rate down to 3 per cent.

'The Fed has been on the curve, if not ahead of it,' Mr Biggar said. 'Meanwhile, the impact of Washington's US$145 billion fiscal stimulus package should kick in by May. And we should also see US corporate earnings improving during the second half, especially for exports.' He says with half of the total earnings of S&P 500 companies coming from offshore, the weak US dollar environment will be a boost for them.

But while painting a sanguine picture for the second half of this year, Mr Biggar warns of one more major market collapse between now and then. 'We haven't seen a capitulation selling yet which will totally flush out the system and set it on course for the next recovery,' he said. 'But this will happen in the next couple of months as banks will demonstrate their ultimate exposure (to the sub-prime collateralised debt obligations).'

This will pull the S&P500 down to retest 1,310, he said. If this does not hold, the index will hit a trough at 1,170 points. And that will be the buy signal for value investors. 'The shock value of bailouts will rattle many, but markets have a way of getting immune to this kind of news,' he said. 'Ultimately, the market will price in the risks.'

Mr Biggar is not a proponent of the theory that Asian markets and economies have decoupled from the US. 'We have already seen how the US market's pull-back has caused the collapse across this region,' he said. 'And the sub-prime losses are not just losses in the US. The exposure is global.'

Mr Biggar told BT in June last year that several US lenders were on the verge of declaring huge sub-prime losses, and that these would trigger a meltdown on Wall Street and elsewhere. 'All it would take is a failure of one large US bank,' Mr Biggar said then. 'In the US sub-prime segment, which accounts for 20 per cent of total lending, delinquencies and foreclosures have been building up. But the troubles have been largely hidden away.'

Those words proved prescient. Just a month later, Countrywide Financial Corp - America's largest mortgage lender - reported a sharp rise in delinquencies. This was followed by American Home Mortgage's loan delinquencies, after which two of Bear Stearns' hedge funds hit the sub-prime skids.

Fast-forward, and Mr Biggar has this prediction: 'If the parallels to the 1990-91 S&L crisis and what we have now are anything to go by, we should pull out of this in about three to four months.' Many here would recall that after the recovery from the 1991 crisis, Asian markets headed into their biggest 'super-bull' run ever in 1993.

And many must also be praying Mr Biggar is spot on - again.

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