Infection or immunity in year of two halves

In April one of the City’s most respected economists wrote a column in Fund Strategy which got the credit crunch dramatically wrong:

“The greater worry is that we will see wider indirect effects if other parts of the economy become affected. One route through which this could happen is via a credit crunch, where financial institutions tighten their lending standards, or even withdraw credit to borrowers in response to subprime losses. This looks unlikely.”

It is easy to see the problems with this argument with the benefit of hindsight. But at the time few commentators were warning of the danger of a credit crunch and those that were generally took an optimistic line.

Yet it is clear now that the problems in the American subprime market and the subsequent credit crunch divided 2007 in two. As Simon Hildrey writes in this week’s cover story it was a year of two halves.

The subprime crisis was first discussed in detail in a cover story by Vanessa Drucker in the July 23 issue. After that there were several related covers. But it was first mentioned as an aside on March 19 in a Focus article on Ruffer. In contrast, on February 5 there was a news story on Threadneedle unveiling a property fund that, among other things, invested in subprime lenders.

Emerging markets was another key theme of the year. There is no doubt that the developing world has led the recent period of strong global growth. This was reflected in several cover stories on emerging markets including on Africa, Asia and Latin America. Covers on infrastructure and natural resources were also closely linked to the developing economy-led boom.

These two key themes were partly related. One reason emerging markets remained popular in the second half of the year was that they appeared resilient in relation to the credit crunch.

While developed markets were hit by the squeeze on credit the emerging world appeared relatively immune. However, as Sunil Jagtiani argued in his October 22 cover there is a strong case to be made that the Chinese stockmarket is developing into a large bubble.

By the end of the year it was still not clear how much further the credit crunch has to go. But with the benefit of hindsight it is apparent that it was the defining development of the year.