The year is half over and, so far, the stock market seems to be making steady progress. Although the consensus around the City is that we should still be bracing ourselves for one, or in all likelihood, two more shocks before a bull market truly gets under way, there is little doubt that confidence is at a much higher level than it was in the dark days of last autumn.

Which leads me to wonder whether, when the credit crunch of 2008 is but a distant memory, will we be putting its lessons into practice or will we be slipping back into the bad habits that put us there in the first place?

Blame it on the bankers
The evidence at the moment is that investors are pointing the finger of blame squarely at the banking sector. Research recently published by independent market analyst Datamonitor suggests that 83 per cent of the British public think that the banks are to blame for both the credit crunch and the economic downturn. However, before the politicians start breathing a sigh of relief, the same survey found that 82 per cent put equal blame on the government and the regulators for our current economic woes.

Such attitudes are hardly surprising. The survey was conducted over the last weekend in May, when the political turmoil was at its height. Nor is the overriding feeling that things are going to get worse before they get better. After all, with government debt reaching record levels and economic recovery likely to be slow at best, whoever is running the country in two or three, or even five, years’ time is going to have very little room for manoeuvre. Taxes will have to rise, public spending will have to fall and confidence will suffer as a result.

Learning the lessons
This is not a reason to fall into depression, but it does mean that, in future, we are all going to have to ‘cut our cloth to fit’. Surely the most important lesson to have come out of the credit crunch is that an over-reliance on gearing , or ‘leverage’ as the Americans like to call it, is a very bad idea. Not only are individual consumers going to have to learn to live with a much reduced capacity to borrow, but companies are going to be in the same boat.

This should make investors re-examine their strategies too, concentrating on companies with strong business models that generate real, hard cash. It is a favourite maxim of fund managers, at least those with a record of successful stockpicking, that ‘you can’t hide cash’. Nor, it must be said, can you just create it out of thin air. In the brave new post-credit crunch world, a focus on real assets generating real earnings will be paramount.

This is not to say that all borrowing is necessarily bad. The judicious use of gearing can greatly enhance your overall returns. But too much borrowing invariably ends in tears, and those companies that emerge from the credit crunch in the healthiest shape will be those that have managed to pay down their debt to manageable levels – or, better still, never took on too much of it in the first place.

Keiron Root
Editor