The Credit Crunch is Over

“The Credit Crunch is Over” is a bold statement to make, and more experienced people foolishly made the same prediction much earlier in the year.

However, as we near the first anniversary of the Credit Crunch slamming into the financial markets, here are the observations and predictions from Finance Markets:

1. The Credit Crisis is over

That doesn’t mean to say the effects of the Credit Crunch are over - anything but. We’re going to see the fall out from this continue to impact all aspects of trading and personal living through the next 2-3 years.

The Credit Crunch was fundamentally triggered by a collapse in lending, after the value of various investment vehicles were found to be unrealistically over-valued. The result of this was to effectively shut off pretty much all forms of lending, at the corporate and personal level.

However, lending markets have re-opened - albeit tentatively - and mortgage lending on the high street has already begun to offer more attracted lending rates. Lenders have increased their liquidity through rebuilding capital ratios, and are increasingly looking to lend in prime markets. The trend can only expand.

While the number of loan products are still very much reduced, as are the number of lenders, the fact that high-street mortgage rates are starting to come down shows the original process that created the Credit Crunch is now being reversed.

2. FTSE 100

A year ago today the FTSE 100 was at 6697 points. At the time of reporting, it has fallen to 5094.

My prediction is that the FTSE 100 has now finished a final steep decline - for the moment.

However, trading between June 2008 to June 2009 will remain marked by extreme volatility, and the FTSE 100 could even edge towards 4500 points by October.

We will see repeated combinations of rallies and retreats, but year on year, net gains and losses on the FTSE 100 overall will be relatively flat.

A special note about Banks: shares in banks have fallen dramatically since the Credit Crunch hit. The extreme and unrealistic optimism proceeding the Credit Crunch has been replaced by an extreme and unrealistic pessimism since.

Major UK banks such as HBOS, Lloyds TSB, Royal Bank of Scotland and Barclays have seen steep falls - but I do not expect them to fall much further. The financial sector also remains ripe for acquisitions in all markets.

Therefore the major driver in any further falls to the FTSE 100 are likely to be driven by mining and oil companies.

3. Property Market

The UK property market for 2008 will fall around 10% +/- 2%. However, this fall will slow to around 8% +/- 2% through 2009.

In 2010, different areas of the country will be subject to difference price movements, with London and the South East likely to report rises across multiple regions, while Northern England and Scotland will still be reporting falls of up to 5%.

The overall fall in average property prices over 2008-2010 will therefore be in the region of up to 20%, but there will be marked differences in the performance of the lower end of the market, especially new build flats, which will suffer proportionally more than standard detached residential properties.

Overall

Overall, the Credit Crunch has been the biggest economic event of the 21st Century, and probably the biggest for 50 years.

Despite that the short-term outlook remains strained, the expectation here at Finance Markets is that the process of recovery is now in play.

The effects will still take time to filter through - like trying to turn around a huge oil tanker, the wheel has been turned around and the first causes of the Credit Crunch are now in reverse, but will take some time for the tanker to be fully aligned to its new direction.

With this, the process of recovery has slowly but surely begun.

It’s a daring statement to make, but it remains to be seen if these predictions justify the claim.

UPDATE: Looks like the stock markets read FM. After posting this, UK banking stocks turned around sharp losses on the day to end flat, and the Dow Jones enjoyed a powerful rally, rising over 276 points, with financial stocks leading the way. Talk about timing.