Tonight:
4°c
Having got used to the fact that sovereign wealth funds are the new masters of the financial universe — being the only people with any money — we should not be surprised that one of the big Chinese players now seems to own about 1% of most of the companies in the FTSE index.
If the reports are true, it seems to be behaving like a tracker fund, which makes a lot of sense.
Some investments are, of course, significantly larger — a different part of the Chinese banking system being a major shareholder in Barclays. The Chinese also crop up as potential players every time someone goes looking for money.
If their surpluses keep growing — a big if, given how much they depend on an undervalued currency that is causing them big problems with inflation — it is hard to disagree with the forecast that in 10 years' time they will own 10% of most of the serious listed financial institutions in London.
However, it is not so much the behaviour of the Chinese which should concern us, but that of our own domestic financial players.
WM, the organisation which tracks the performance of pension funds, reported a few weeks ago that the 12 months from March 2007 to March 2008 saw the biggest shift in asset allocation in 30 years. Our pension funds were getting rid of their equities, mostly to buy bonds and a little to buy alternatives — a way of getting equity performance at 10 times the cost.
The overall proportion of funds invested in equities dropped from 63% to 54%, but the relative fall in the proportion of UK equities fell more sharply, as some funds still holding equities switched from the UK to overseas.
My question is this: what does it say for the future of the UK if we decide the best place for our savings is UK government bonds while the Chinese think their money is much safer and likely to do much better in UK equities?
A chorus that must be ignored
One scary bit of information floating around the internet is a World Bank study which looked at what happened in the past when governments intervened to stop banks failing. It found such action normally raises the economic cost of the problem by a factor of 10.
The US Treasury's nationalisation of Fannie Mae and Freddie Mac earlier this week will no doubt turn into the most expensive bail-out in history, but has set off a chorus for similar action in the UK.
We don't have anything quite like Fannie and Freddie here — our authorities would never allow a business model which made Northern Rock look conservative — but still the pressure on Alastair Darling to "do something" to get the mortgage market moving increases. We must hope he continues to listen to Mervyn King, who is steadfastly and rightly opposed.
The Bank of England is willing to swap marketable debt for illiquid mortgage assets to give banks access to cash, but will only take mortgages some years old.
In contrast the European Central Bank was less restrictive than the Bank and now finds, to its cost, that it is being stuffed with low-quality assets derived from new lending.
Some banks appear to have learned nothing and the ECB is now considering Bank of England-style restrictions before it is itself dragged into the mire by those it is trying to pull from it.
The basic lesson in all this is put with admirable brevity by Leigh Skene of Lombard Street Research. The credit crunch is the start of the solution not part of the problem, he says.
Brave but risky for Informa
They are a brave lot at Informa — or perhaps that should be foolhardy. The group has batted away a private-equity offer and pressed the Takeover Panel for a put-up-or-shut-up ruling to try to see off a bid from a consortium led by Providence Equity Partners. It should develop a sense of history.
The fact is that business slowdowns are almost always disastrous for groups like Informa. People don't go to conferences because they don't like to be away from the office; they cancel magazine and newsletter subscriptions to trim costs, recruitment ads disappear as no one is hiring new staff and business-to-business ads become more selective because so few are buying. Publishing revenues plummet
The ITV board ignored a private-equity offer above its current share price because it seemed like a good idea at the time, though few share that view now.
Informa should ask itself how, even if Providence Equity wanted to increase its offer, it could possibly persuade the banks in the current climate to up the ante. Then it should swallow hard and grab what's available before the bidder changes its mind.
