effects and central banks (the US Fed in particular), have been forced to act decisively and materially to avert a complete meltdown.

While the latest proposed bail-outs and rulings (including banning short-selling), have provided some short term relief, and should restore some confidence in the financial system, it is unlikely that all the bad news is over, or that the global economy will recover quickly.

How does this international banking crisis compare with previous crises?

This crisis is very serious indeed. Three of the five big investment banks in the US no longer exist and the other two are de-leveraging and changing their status to commercial banks. The extent of the Fed’s proposed bail-out ($700 billion) is unprecedented.

The crisis entered a self fulfilling downward spiral where asset prices were being written down, impacting the capital bases of banks who were struggling to raise fresh capital, resulting in a lack of confidence and further derating.

Interestingly though, to date, non-financial US companies (especially exporters) have continued to perform above expectations. The Fed’s actions are a desperate attempt to prevent the financial crisis spilling over into the rest of the economy. Clearly some level of contagion is inevitable as bankers lose their jobs, spend less and as asset prices plummet (houses and equities in particular), consumers feel less wealthy and are less inclined to spend.

What exposure do South African companies have to sub-prime?

South African companies have relatively low direct exposures to sub-prime. South African banks have remained relatively unscathed, partly as a result of exchange controls, and partly as a result of tougher monetary policy and legislation.

The greater issue probably relates to the indirect impact of the fall-out. Slowing economic growth, lower commodity prices and recession (in the economies of our major trading partners), will impact on South African exports, growth and sentiment. The extent of the impact in all likelihood depends on how successfully the Fed is able to restrict the crisis to the financial sector.

What has been the impact on asset prices?

The impact has been severe. Equity indices around the world have dropped significantly (more than 20%) with certain sectors (particularly financials) and countries (such as China) falling by more than 50%. Property prices have also softened, particularly in the US and the UK. Many commodities have also declined materially on fears of slower world economic growth. In short, there has been very little place to hide as investors have been in a hurry to take risk off the table.

What should investors do, and how does one avoid making an inappropriate decision?

Jeremy Gardiner, director at Investec Asset management shares his views on what investors should be doing.

The answer is that there is not much you can do at this stage. You certainly shouldn’t be fundamentally restructuring your portfolio now. The time for portfolio restructuring is when markets are calm, not during a hurricane. Why? Because if you try and change direction now you will be acting largely on emotional rather than fundamental reasoning, and investment decisions made emotionally generally tend to be wrong. In situations like these investors tend to go against common investment theory, and instead of buying cheap and selling expensive, they sell cheap (out of panic) and buy back more expensively.

And therein lies the problem. It is very tempting to sell into cash at this point, and if you (or indeed anyone) were capable of calling the bottom of the market, this approach may be viable. However, research shows that when markets turn positive and rally, much of the gains are made in the first three months, a period during which most investors are waiting for confirmation that the rally is sustainable. Cashed-up investors in these phases face the unenviable quandary of piling into a rising market or holding back in the hope of a setback. They usually do the latter, which means that every mild setback is met with a storm of buying. Waiting for the low before buying always looks attractive on the way down, but the problems with it are only apparent on the way back up.

Selling now to buy back at a lower price is even more difficult – what if the assumption about lower prices is wrong? It is psychologically very difficult to buy back at higher prices, so such a strategy runs the risk of selling at a low and not getting back in. There are indeed risks during times like this, but there are also significant opportunities starting to emerge. You can sit on the side until it feels more comfortable to invest, but when it does feel more comfortable, it may no longer be profitable to do so.