Bursting Of Sub-Prime Bubble Healthy, Says Economist

Source : The Business Times, August 18, 2007

WHILE much uncertainty remains over the equity markets, the unravelling of the US sub-prime mortgage problems is a healthy development that should benefit economies over the longer term, a Singapore conference was told yesterday.

At the CPA Forum, Deutsche Bank's chief economist Sanjeev Sanyal said it was a welcome sign that the bubble should burst, adding that this is 'better than allowing the problem to fester'.

He was referring to knock-on effects of the crash in the US sub-prime mortgages market, which has resulted in stockmarket downturns across the world.

Some of the major issues from the fallout include the ownership of financial products backed by sub-prime loans, and the absence of a secondary market for these instruments. As a result, these products cannot be easily priced, and the uncertainty over the investment climate continues.

Mr Sanyal believes that the credit crunch in the US may affect consumption there, hitting Asian exports as a result.

However, the impact on India could be limited owing to its strong domestic demand, said Satyanarayan Ramamurthy, head of corporate finance at KPMG Singapore. Speakers pointed out that savings rates in India have been rising in recent years, and this provides more resources for the country to undertake capital-intensive projects.

As for Singapore, Mr Sanyal believes the fundamentals remain strong owing to robust domestic demand here, backed by the retail sales numbers. 'There is a growth engine particularly led by investments in building and construction which I think is very visible and which we have seen come through in the numbers in recent months,' he said.

He noted that domestic demand had driven second-quarter growth here to an impressive 8.6 per cent.

Also at the forum was Macquarie Bank's Simon Lyons, head of financial services group in Asia, who believes that there will be a lot more due diligence carried on investments in future.

Moreover, transparency levels may rise and 'we should come out of this far better than before', he said.

Yesterday, conference participants were also told that the infrastructure sector may benefit from the current crisis, as investors look to such assets as 'long-term investments with low risk characteristics', said Mr Ramamurthy.

And Asia is an attractive destination, due to the shortage of quality infrastructure assets in emerging markets here. 'However, the challenge is for the governments to create frameworks for investors to reap returns from their investments,' he said.

Mr Lyons has this advice for long-term investors: 'Just stick to the fundamentals - good-quality stocks in the appropriate markets, diversification is key, and avoid leveraged positions.'