The full extent of the credit market collapse became apparent in September as the list of high profile victims lengthened dramatically and the world's monetary authorities appeared powerless in the face of evaporating risk tolerance and moribund credit markets.With risk aversion reaching almost unprecedented levels, liquidity in the interbank and commercial paper markets collapsed and short term interest rates jumped sharply. Confusion over the Paulson bailout package added to market uncertainty, culminating in what the Financial Times dubbed "Meltdown Monday" on the penultimate day of the month, when the Dow sustained its biggest points fall ever.Key Changes to the Portfolio In the very short term, investors are waking up to a new economic reality, with aggressive bouts of often irrational capitulation selling. This continues to dictate a defensive strategy, with a focus on domestic stocks, telecommunications, infrastructure plays and high yielding companies with strong balance sheets and plenty of free cash flow. Global cyclicals and export sensitive names are still to be avoided.Over the month, we reduced exposure to property and added Huaneng Power, one of China's leading power producers. Performance was restrained by certain more growth-oriented stocks which suffered in the current environment.
Once the current capitulation phase is over, we can look forward to a period of greater stability, albeit in an environment of more pedestrian global growth.