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Mon, Jul 30, 2007 - Page 10 News List

Rough sailing ahead for investors

NOTHING EXTREME Analysts say that the housing and credit crises in the US are rather localized and unlikely to spread throughout the international financial system


The recent turbulence on world markets, sparked by fears of a global credit crunch, heralds some rough sailing ahead for investors rather than a systemic financial meltdown, analysts say.

Stock markets in the Asia-Pacific region fell sharply on Friday in the wake of Thursday's alarming 2 percent plunge on Wall Street.

But European exchanges on Friday pared their losses after steep declines of between 2 percent and 3 percent the day before.

Markets in London, Paris and Frankfurt ended the week on losses limited to 0.58 percent, 0.55 percent and 0.76 percent respectively.

The sell-off the previous day was triggered by a 6.6 percent fall in sales of new homes in the US last month, intensifying concern for the health of the key US housing market.

Investors staged a "flight to quality," transferring some of their money from stocks to government bonds, a trend that sparked fears of a possible deterioration in the ability of companies to get credit, notably at a time when interest rates are on the rise in Europe.

Rising oil prices and anxiety over a generalized exacerbation of inflation added to investor unease.

World stock markets had been moving noticeably higher in recent months, continuing an upward course that began five years ago and suggesting that they might now be in for a long-term correction.

The Dow Jones Industrial Average has gained 22 percent in the past year, including an 8 percent increase since January.

Exchanges in Asia and Europe have also had a solid four-year run, with both Hong Kong and Frankfurt gaining 13 percent.

Weaker advances were recorded in Tokyo, 0.34 percent, London, 0.55 percent and Paris, 2.5 percent.

But analysts remain optimistic.

For Mathilde Lemoine, chief economist at the HSBC bank, the housing and credit crises in the US are "rather localized" and are not likely to spread throughout the global financial system -- even if they do trigger a downturn in US consumer spending.

"A rising market that goes on for several years is not unusual," said Arthur van Slooten, a market strategist at Societe Generale.

"There have been at least eight periods like that in the past 100 years," he said. At current levels share prices do not appear to be "extreme," he added.

The correction that set in last week, he said, was "salutary," given that world economic prospects remain positive.

The IMF has just raised its global growth forecast, thanks largely to the performance of emerging market countries such as China.

The IMF now sees world economic momentum of 5.2 percent this year and next.

And while the US economy is encountering difficulties now, "forward-looking indicators continue to point to a pickup over the next several months," he said.

Mathilde Lemoine said investors have reacted calmly to the slowdown in the US given that growth remains healthy in Asia and Europe.

She foresees stability returning to stock market indices by the end of the year, interrupted now and again by "rude but passing" corrections.

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