More 'dirty laundry to be aired' despite market rally

This week's rally in stock prices has been seen by some as a sign that most of 'the dirty laundry' from the credit crunch has now been 'put out to air', but according to Jeremy Tigue, manager of the Foreign & Colonial Investment Trust, one of Britain's biggest retail investment funds, volatility is far from over and more write-downs are on the cards.

"It would be foolish to think that this week's write-downs announcement by UBS and Deutsche Bank mark the beginning of the end of the sub-prime crisis," said Tigue.

The resignation of UBS's chairman following the announcement of a massive $19bn in write-downs was seen as good news by the market. "Moreover the fact that both UBS and Lehman Brothers started raising funds through rights issues had a very positive effect in the markets, with Lehmans getting oversubscribed by an unexpected number of investors wanting to participate," Tigue added.

"However I don't think the nasty surprises are over and more banks will announce first quarter write-downs in the next few weeks."

Tigue mentioned UK bank HBOS to illustrate how volatile conditions remain over the short term.

"Two weeks ago rumours that HBOS was going to go bust sent its share price down to around 400p, and this week we've have seen it going up to over 600p. We are talking here about a big bank, the largest savings and mortgage provider in the UK, and not a speculative stock. This really gives you an idea of how much volatility there is."

The other important factor that will affect the way markets behave over the next few months is that people's attention is clearly moving away from the US housing market to the UK. "The US is yesterday's story and today everyone is following how things are getting tighter and tighter for the UK housing market, with lenders withdrawing mortgage offers and prices falling.

"For me, the best way to understand what is going on is to picture a race between two cars, one representing the fall in house prices and the other the credit crunch, under the close eye of central banks, in particular the Federal Reserve. Every day we get a different view on which car is going ahead but the race is still not over. For optimists like me, the Fed will keep cutting interest rates to stop house prices falling. I don't know how long it's going to take but eventually the market will stabilise and stocks prices will go up considerably as uncertainty fades away. But we are still not there yet."

Commenting on emerging markets, Tigue believes that, as whole, economic data across the different regions still shows growth, although some economies are suffering more than others. "All the bad news coming from China regarding high inflation and political tensions will continue over the medium term but emerging markets still present very attractive investment opportunities. However he highlights inflation, in particular food inflation, in some of these markets as a big problem to take into account. "Food price inflation is a global phenomenon but its effects are much more significant on emerging economies. People in developed countries might allocate 10% of their income to food, but in emerging markets they can be spending up to 30% of their wages on food," he concluded.