Market volatility – Ninja impact

You will no doubt be aware that the markets have again been relatively volatile of late, not helped by the renewed press coverage recently with regard to the Northern Rock saga.

Much of this boils down to the US sub prime lending market and so called Ninja loans, an acronym derived from borrowers with No Income, No Job or Assets. Ninja loans were granted by the US Banks on the basis that interest rates were very low (1% in 2004), and were secured against Property and so even if the borrower defaulted it was expected the repossession value would offset any bad debt. Unfortunately the US housing market has fallen, at the same time as US interest rates rose (4.75% now) and not unsurprisingly Ninja loans have left some US lenders with heavy losses.

Fortunately UK Banks maintain better lending controls and so it is not expected that UK Banks will take a direct hit in the same way. So you may ask why the markets have fallen and why Northern Rock has had to go cap in hand to the Bank of England. The effect of Ninja loans has spread due to the globalisation of markets and the US Banks packaging up this debt and selling it on to other financial institutions as "Collaterised Mortgage Debt". Uncertainty now exists over exactly who is exposed to the bad debt and to what extent. As a result it has become more difficult and more expensive for lending institutions to borrow money to lend on to customers. Northern Rock is particularly exposed as their business is centred primarily around mortgages. They do not have access to a large deposit account base and as a result they are heavily reliant on the credit market to raise lending funds. 80% of their loans are raised from the credit market with only 20% from their deposit account base. It is worth noting that building societies are limited by current legislation to a maximum of 50% raised in this way.

However, the experts do not believe Northern Rock is in real trouble. The Bank of England has been very clear that they only granted loans and the Government have "guaranteed" deposits because this is believed to be a temporary problem and that they have no concerns over Northern Rock’s long term future. It is worth noting Northern Rock has £113 billion in assets. The Chancellor, Alistair Darling, has said the real problem is that there is a lot of money in the system but no-one is willing to lend it at the moment.

Of course uncertainty always brings volatility and so the markets have continued to experience considerable peaks and troughs lately. Those who have already invested should be reminded that it is times like these that a diversified portfolio could be of real benefit.

Anyone who is concerned about investing now should consider the "Time not timing" principle which the table below demonstrates.

Peaks and troughs of the FTSE 100 index:

Year Event Drop from peak 5 years later
1987 Black Monday -34% +76%
1990 Iraq invades Kuwait -17% +77%
1994 EMU -21% +126%
2001 9/11 -29% +69%

Whilst recent events are not on the scale of Black Monday or 9/11 this does provide some useful information if you are considering deferring investment until a later date.

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