Staring Into Empty Space... - Baffled Fund Managers On The Crisis

Interestingly enough, the only parallel the respondents were able to draw between the present predicaments and the 1998 Russian economic crisis was the mass unwinding of leveraged positions.

“The current situation is not even on the same page with the Russian crisis or any other stock exchange panics in my time for that matter," a stock portfolio manager, who is not in his original line of business anymore, told Portfolio.hu.

He said he was glad for not being in a position to make decisions, because he would have no idea to arrange his portfolios for a rise or further falls.

“In 1998, during the Russian crisis we were aware that risk appetite collapsed due to the state's going bust and we knew that it would blow over. We knew almost hands down that we have to buy into the plummet," the fund manager said. He believes, though, that the current situation is entirely different since the world economy is facing unprecedented risks that are complex almost to the point of incomprehension.

Eyes blank...

Another institutional investor, who is still active (since 1999) and also spoke on condition of anonymity, said the current situation resembles the 1998 Russian crisis very much.

The fund manager reminded that a huge wave of forced liquidation swept across Hungary in 1998, as well, and what we're witnessing right now is the same thing only in global proportions.

“From this perspective, the current situation is the same as in 1998 only to the second power. Margin calls are being received, you gotta put in the deposits but as there's no money you have to execute brutal sales irrespective of the price of assets."

He called the 2000 stock exchange crisis “ridiculous" compared to the one in 1998 let alone the current one, since “then it was a simple recession". In 1998, the question was whether brokerage houses would go bust or not, while now it is the bankruptcy of banks that is “terrorising investors".

“Frankly, I haven't got a clue as to when and how this would end, I'm just staring into empty space. I like buying in panic and I did so. The problem is panic grew bigger. I thought it would be a good idea to invest into Hungarian government papers, but the market froze, so I was wrong. The 5-yr yield is around 11-12% already, so it would be a folly to get out now, I'm holding onto my bonds until maturity," he added.

They didn't know what they were buying!

The third local portfolio manager we have asked said the current situation could be compared to the 1998 crisis and then it couldn't. The market had been characterised by mass liquidation and a series of unwinding of leveraged positions, but the big difference is that the source of the woes had been an emerging economy then.

“Now there's a copious amount of conundrums with developed countries and their banks, and as these countries remain the centre of the world's money markets and the home of the largest fortunes the current situation is absolutely different than the previous crises."

Contrary to 1998, it is presently a confidence crisis rather than a liquidity crisis, since several banks are sitting on billions of US dollars and euros, only they are too worried about risks to place their funds.

These invisible risks were unleashed by the complex structured products that the investment and banking segments created themselves in the past years. Investors were purchasing these assets without knowing what they were buying and the regulatory authorities had even less clues about them.

“Once regulations catch up with the financial sector that progressed at an unbelievable pace over the past years, confidence could find its way back onto the market," he said, adding that he was sceptical as to how persistent the markets' sharp rise seen in the past two days could be.

“What is taking place right now is unprecedented, there is nothing to base prognoses on," he concluded.

They think the same in every crisis

The fourth fund manager asked was the only one with a pinch of optimism in his outlook. Investors always think that it is that particular crisis they are in that will be the biggest ever and say they haven't seen anything like it before.

“I'm not trying to belittle the current situation. There will be a recession, no doubt about it, but following its huge plummet the stock market is about to price in a total collapse of the real economy. It is like you wouldn't step out onto the streets because you're afraid you will be hit by a car," the fund manager said. He noted he sees similarities and contradicting factors between the current bear market and the 1998 situation.

He also noted the mass liquidation of leveraged positions as a common feature, but stressed that it was much larger in 1998 in Hungary as speculators were going long a lot more at that time.

“From the Hungarian investors' point of view, the Russian crisis was a lot bloodier than the phase of the sub-prime crisis we have already passed," he said. A great lesson from the 1998 crisis was that whoever bought in bulk then got off pretty well and they did not even have to buy at the bottom of the market.

“Make no mistake there is room to go lower even from current levels, but it is also on the cards that the recession will drag out for years, although I give that only a little chance," the expert, who had managed investment funds already back in 1998, concluded."

Source: Portfolio Online Financial Journal