Bar-On warns against herd mentality

"Until the level of uncertainty falls, the right thing to do is to seek advice, examine alternatives and learn about their portfolios before taking any action."

By SHARON WROBEL
September 24, 2008 11:38
3 minute read.
Bar-On warns against herd mentality

Ronnie Bar-On 88 224. (photo credit: Courtesy)

Investors should behave in a calculated manner to avoid panicky behavior and herd mentality in response to the global financial crisis, Finance Minister Ronnie Bar-On said Tuesday. "Until the level of uncertainty falls, the right thing for the general public invested in short- and long-term instruments to do, is to seek advice, examine alternatives and learn about their portfolios before taking any action," he said at a session of the Knesset Finance Committee, which invited leaders of the financial sector to discuss the implications of the global financial crisis. "Herd mentality driven by newspaper headlines and the media, and the hastened withdrawal of money from savings funds, must be avoided. They don't take into account the investors' personal price in the long term." Similarly, Bank of Israel Governor Stanley Fischer said the general public needed to make individual decisions about their investments and savings. "It is important that each of us makes their own calculations about their individual savings with levelheadedness, taking into account the medium- and long-term view," he said. "This is true for the general behavior and in particular now." Despite the efforts of the US Federal Reserve and the recent announcement of a financial rescue plan by the Bush administration, Fischer said the global financial crisis was still deepening. "One of the main features of this period is the high level of uncertainty," he said. "Although the US government announced a very positive plan to buy up bad assets from financial institutions, the danger itself hasn't passed yet. We must wait and see how the plan progresses. The situation is still fragile and sensitive." Commenting on the local banking sector, Fischer said the banks had no finance problems. "For the moment, we don't see any reason for interference or the imposition of special measures," he said. "A time of crisis is not the right time to make changes to economic or financial models." At the end of last week, the Finance Ministry and the Bank of Israel announced the establishment of a joint team to monitor and assess the global financial situation and its impact on the local market and economy. Fischer said the local economy, in general, and the financial sector, in particular, were in a good position to weather the repercussions of the global financial crisis because their ties to overseas counterparts are limited. Four of Israel's five biggest banks reported they collectively have at least $266 million in assets at risk related to the collapse of Lehman Brothers. "Many of the sophisticated financial instruments that were revealed as one of the sources for the crisis were not operated by the Israeli market, while other instruments had low exposure in the local market," Bar-On said. "The Israeli stock market was not significantly exposed to the same financing practices of problematic assets and high-risk levels operated in other markets, which were later revealed by the subprime mortgage crisis." Also speaking at the meeting, Israel Discount Bank chairman Shlomo Zohar said immediate action was needed to remove "excessive legislation" in the banking sector, instead of developing theories and sitting on monitoring teams. "We look like a deserted island in the midst of a tsunami," he said. "Time is a factor in this crisis, which could have a snowball effect." Meanwhile, analysts at Deutsche Bank warned Tuesday that the economy, which has been particularly resilient in the face of the global slowdown as GDP increased by 4.2% in second quarter, was beginning to slow. "We expect last week's events to speed the deterioration of macro trends," the bank said in a note to investors. "Israel's highly leveraged conglomerates and real-estate developers will likely continue to face challenges in raising new debt financing or deleveraging their balance sheets. The same applies for the hi-tech sector, whose main sources of funding are US-based venture capital firms. The weakness in the Tel Aviv stock market is likely to lead to a slowdown in private consumption as the wealth effect that was prevalent over the past two years is reversed."


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