Investment Outlook – August 2008

World Markets

Remaining Volatile

The extreme investor pessimism recorded in the two most recent Merrill Lynch surveys of fund managers and the historically high levels of liquidity finally triggered a powerful, if short-lived, relief rally in global financials when recent results of some US banks beat depressed expectations. A sudden downward move in oil prices from record highs reinforced and broadened the rally. This does not mean that we are out of danger; even though equity valuations in most markets are at historically attractive levels, this is not a typical economic slowdown. Evidence abounds that the credit crisis is affecting the real economy. Large companies are squeezing their small suppliers and banks are putting pressure on borrowers seeking scarce capital to transfer other banking business to them as a condition for receiving a loan. Interest rates are rising for loans repayable in