KEY POINTS:
Once Governments start to panic investors can relax, Lucy MacDonald says.
"The markets have done most of their panicking. Even if they don't recover in a hurry, they have done most of their damage," said MacDonald, chief investment officer, global equities, of RCM, the equities fund management arm of European financial services giant Allianz.
RCM has rather more money entrusted to it than the New Zealand Superannuation Fund. She was in Wellington to brief Arcus Investment Management, an RCM client, on Thursday amid a continued avalanche of selling on world markets.
"Nothing is really going to move until credit markets, which are still rather frozen, loosen up," she said.
"At this point it is difficult for people to have confidence thatwhat Governments have announced will have the required effect.There's still a lot of scepticism about how these measures will work."
But the policy of buying equity in banks, as opposed to being a buyer of last resort for impaired assets they hold, was entirely sensible, she said. "You've got a better idea of what the value is."
As well as watching interbank lending rates and credit spreads for signs the credit markets are thawing, MacDonald will be looking for large volumes of buying by the big institutional investors.
"Until you get continued rises on big volumes, you are not going to get a recovery. At the moment it's still larger volumes on the down days."
For many market participants a bear market was new territory, MacDonald said.
"I've been an investor for 22 years and I have seen a couple of crashes but nothing on this scale."
But even a strong rally would not necessarily mark a turning point.
"You never have a V-shape at the bottom of a bear market.
"It's always a double bottom at least before you recover. And we will need to see some good news on the real economy, some green shoots sprouting up."
At this point a global recession was a sensible central assumption, MacDonald said. "And we are not expecting a sharp recovery."
The International Monetary Fund in a report last week looked at a cluster of recessions in the 1990s which had been preceded by banking crises, in Scandinavia, Japan and the United States.
The average experience was for shares to fall, peak to trough, by 55 per cent and house prices by 20 per cent. Gross domestic product rolled back a cumulative 5 per cent and the average duration before full recovery was four years.
The Dow has already fallen around 40 per cent from its peak just over a year ago.
"This time we started from a position where shares were not over-valued," MacDonald said.
Long-term investors who were not concerned about exactly when the market bottomed and were content to have an attractive average entry price over several years might think it not a bad time to staring putting money in the market.
"But most people are not thinking long-term."
Compared with fixed-interest investments, equities were good value now even if you expected corporate earnings to be cut, she said.
The size of the current shock was probably the best protection against it happening again.
"Memories of this won't fade in a hurry."
She quoted Warren Buffett's comparison with a heart attack: The patient needs emergency treatment not lectures about diet.
And the latter would probably be gratuitous later, too. "People won't be going back to to the same behaviour."
MacDonald is unconvinced by Federal Reserve chairman Ben Bernanke's concern about too many firms being too big to fail.
"I don't think too much concentration has been a big factor in what's gone on. Having a lot of small, weak banks failing in the 1930s wasn't helpful either. And the fact that Lehman was allowed to go under means that no company can be sure it would be saved."
A return to traditional, conservative banking - with much better risk modelling - is desirable, MacDonald believes. "A bank should be boring. It's a utility."
But it would be a shame if that left no room for innovation.
