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Markets vulnerable if banks buy shares with bailout cash, says Moonraker

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Moonraker Fund Management, an independent investment boutique, is concerned that banks may have been using their bailout money to buy equities, helping to fuel a rally that is vulnerable to a major correction if they consequently sell in thinly traded markets.

Instead of lending to businesses and homebuyers, banks may have been using some of their bailout money to buy stocks from an oversold base in March, Moonraker believes.

The British Bankers’ Association’s own figures show that gross mortgage lending by the banks has fallen from a high of GBP21.5bn in June 2007 to GBP9.1bn in August 2009, while new term lending to small businesses was GBP796m in July, compared with around GBP900m last October.

Jeremy Charlesworth, chief investment officer of Moonraker and manager of the Moonraker Commodities Fund and Global Opportunities Fund, says: “Little of the bailout money given to banks seems to have been passed on to businesses or consumers. But it must have gone somewhere and it might have gone to the proprietary desks of the banks to punt the markets. Given all the calls for more transparency, it would be good if the banks could clarify this.

“The banks have every right to use the money they borrow in any way they choose. But it would be good to know how much of the bailout money has been used to buy equities. Clearly, someone has been buying, and given that it hasn’t been ordinary investors and the institutions that does just leave the banks.

“The banks’ balance sheets will certainly have benefited from their equity holdings. If they could sell these investments into a rising market then they would be in a better position to repay their debts. But there will be a problem if the public and institutions do not join the rally and the banks have to sell equities into a vacuum.”

Charlesworth believes the media focus on the banking crisis, politics and debt has distracted investors from other factors that also threaten markets. If investors were less consumed by domestic events, he believes they would be more concerned about rising danger in the Middle East, where a war is escalating in Yemen between the Saudi-backed government and rebels supported by Iran. There is also the potential for an Israeli air strike on Iran, which is close to commissioning a nuclear facility.

Charlesworth adds: “The war in Yemen is getting very little coverage but if Iran is successful in gaining a military foothold there via its proxies then it will have access to the Oman and Aden gulfs, through which 80 per cent of the world’s oil passes. Ominously, Iran has purchased 5,000 sea mines from China in recent years. Iran is also putting the finishing touches to a nuclear reactor facility. The last time a nuclear reactor was about to be commissioned in the region was in Syria in September 2007, when Israel responded by leaving no brick standing.”

Moonraker’s funds offer sterling and US dollar share classes and are available to both institutional and retail clients. The minimum investment is GBP15,000.

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