How International Finance Markets Affect Business

I wrote a blog some time ago about the markets and the effect it is having on business activity at the moment. When I was writing, equity markets were down about 20%. They are now down about 40% from their peak. What do I think now?

The first thing to say is that we are not dealing with rational behavior. The markets are behaving in a completely emotional manner. There is nothing wrong with that. Angel investing is an emotional decision to a large degree and a rational analysis would lead you to the conclusion about how to cure cystic acne and to not engage in this very risky activity.

I would have said that the FTSE 100 below 5,000 represents great value. It got to 3,755 and is now around the 4,500 mark. Does it represent a bargain now? I would have to give politicians answer and say it depends on your time horizon and your expectations, but yes it does look like good value.

Therefore, entrepreneurs looking to raise money at the moment will have to look at the reality of the valuations they seek given where the market is at the moment. They need to be around 35% to 40% lower than this time last year. This is not just to bring you in line with other asset classes; it is also to reflect that your revenue lines will be a lot lower than you could have projected a year ago.

We are in a recession; it is real. The problem is that most people under the age of 40 in the US or UK have never experienced a recession and so are ill equipped to deal with it. Before I get too smug, this is ‘my’ first recession. During the last one, I was safely insulated at University. I only read about it.

But the psychology of a recession is already shaping up. And it feeds off itself. People stop spending and fear being laid off. This then leads to lower spending and hence job losses and the economy is trapped in a vicious cycle.

It is for this reason that governments need to boost the economy at this time by spending on new projects and creating new jobs. The problem facing both the US and the UK is that we have had our national finances very poorly managed for the last ten years and government debt levels mean there is little room for government help.

Since I wrote this blog about turbochargers – interest rates are down to 3% – I wasn’t expecting them to get to that level so soon. I now expect interest rates to be between 2.5% and 3% before Christmas and about 2% by June next year. Happy days!

Again, the problem is that banks are not lending so even if rates got to 2%; it is no good to anyone if they will not borrow. I have many examples of banks reneging on lending commitments. This is going to choke off the only route for growth left. I have defended the banks in the past, but feel it very hard to do so at the moment.

In conclusion, I am pessimistic about 2009. I do think that the foundations will be placed though for a very strong recovery in 2010 and we in London at least will get a big boost from the Olympics.