April 10, 2008 / 8:43 AM / 11 years ago

Financials recovery may take 25 years

LONDON (Reuters) - Financial stocks, which have taken a pounding from the subprime mortgage meltdown, could take up to 25 years to recover to their pre-credit crisis levels, a senior hedge fund manager said on Wednesday.

Hugh Hendry of Eclectica Asset Management speaks with business and financial journalists at the Reuters Building in Canary Wharf in London on April 9, 2008. REUTERS/Toby Melville (BRITAIN)

Speaking at the Reuters Hedge Fund & Private Equity Summit in London, Hugh Hendry, Chief Investment Officer of Eclectica Asset Management, said financial stocks were set to fall further after the credit crisis burst a 16 year bubble in their prices last year.

He predicted Citigroup (C.N), the largest U.S. bank and a major casualty of the crisis, could fall below $10 a share, less than a third of its 150-day moving average price of $32.82, as the credit crisis unravels further.

“When you have a bubble, the other side is profoundly bad,” Hendry said.

“The origination of the bubble in U.S. financing is circa 1991, with the bailout of Citigroup. It is my presumption that we will return to such levels. So that means sub-$10 for Citigroup (C.N),” said Hendry.

When a bubble is created in a sector’s stocks, which sees their weighting dominate the index, it typically takes a generation, or around quarter of the century for them to recover to their pre-bubble levels, he said.

“In 1980 the oil sector occupied about a third of the market capitalisation of the S&P. The next 25 years were scorched earth,” said Hendry.

The financial sector was the biggest sector in the S&P 500, representing around 20 percent of the index last September, as the credit crunch began to bite.

The recovery will be a slow and painful process, said Hendry, citing technology firms such as Microsoft (MSFT.O), which are trading at the same levels as they did back in 1999, before the tech bubble burst the following year. He said he was far more optimistic over the outlook for soft commodity prices.

“It takes time ... healing the process. The financials have just entered that long chamber of time,” he said.

“There will be violent rallies, and those might last for up to a year. But you know when liquidity comes back into a market it seeks out not the laggards but the leaders. The leaders are fertiliser stocks.”

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