Bad Month: Equity

Billions of pounds were wiped off British equities as the US subprime lending crisis hit investor confidence

The FTSE 100 plunged to just under 5,800 by mid August – a fall of 25.7 per cent on its peak just one month before – eliminating its gains for 2007. Market analyst Ryan Kneale of fixed-odds betting outfit BetsForTraders says that the root cause of the crisis is aggressive selling of mortgages in the US to people who can’t afford them, who are now defaulting in numbers much higher than expected. Unfortunately for shareholders, Kneale doesn’t see the problem going away too fast.

‘The bad news is that you typically need three months’ notice to get your money out of a hedge fund,’ he says, adding that many hedge funds have exposure, directly or indirectly, to the subprime market. ‘Six weeks from now, we could see a bigger mess.’

Although a US rate cut might buoy equity markets, Kneale says: ‘It could cause people to go, “Hang on – there’s a problem here.” So we would expect a quick rally then a more sustained downtrend.’