There’s an important anniversary coming up — although it is not one that investors are likely to be celebrating. I’m talking about the 10-year anniversary of the global financial crisis.
The credit crunch was marked by some key events that are forever seared into our consciousness, like the collapse of Lehman Brothers and the run on Northern Rock. It is hard, though, to pin down a single event or date as marking the start of this seismic event. The general consensus is that the crisis unfolded over the course of 2007 and 2008.
So why rekindle memories of a time that saw people lose their livelihoods and stock markets collapse? While we would probably prefer to forget the credit crunch, this anniversary matters because the crisis and its consequences have irrevocably changed the investment landscape.
If you’re struggling to make sense of the hung parliament, the Brexit vote, and the election of President Trump, at least part of the answer can be traced back to the financial crisis. From the search for yield to the rise of populism, the unintended consequences of the financial crisis have been far reaching (I’m guessing you are weary of politics by now, so I will focus on the investment implications).
Let’s start with cash. For almost a decade, interest rates have been at historical lows turning cash from a safe haven into a sinking ship. Negative real interest rates mean the amount of goods our money can buy is reduced — that’s just about bearable over a short period but not for the long term. What cost £100 in January 2009 now costs £119 in real terms. Yet £100 placed in the bank back then will have grown to just £104 on average. The compounding effect of this does real damage to consumer purchasing power.
Move further up the risk spectrum to bonds, and once again, investors are left trying to make sense of negative yields. Equity markets are at highs not seen since 1999 and the days of the dotcom bubble.
Quantitative easing was emergency surgery for the global economy. But what it has done is to completely distort the economic cycle and synchronise economies around the world, leaving the financial system vulnerable to events like a failed Greek bailout or botched Brexit.
Meanwhile, bailouts of bad companies and banks have distorted economic behaviour, and low interest rates are causing a misallocation of capital. The merger and acquisition explosion of recent years is a good example — some view this as positive, others would argue these funds could instead have been channelled into business investment and raised productivity.
We are back in a world where leverage is at record highs — whether it is corporate, government or personal debt, in the developed or the developing world. Global debt now stands at an all-time high of 325 per cent of gross domestic product (GDP). That’s money borrowed from the future, shoring up property and share prices, among others.
Borrowing money to buy a house, or a company borrowing to buy another business, doesn’t contribute to growth — it is simply money which will have to be paid back. You could call it “fake wealth”.
Meanwhile, inequality continues to rise — in the US, soaring to levels last seen in the 1920s. Inequality contributes to social unrest and political volatility, which can act as a drag on growth (the aftermath of the UK election being a case in point).
So as an investor what do you do? Well, you could find a bunker and stash your cash there while you wait for normality to return, but that would be a mistake. The best thing is to do something with your money — anything but putting it on deposit. Today it has become less about doing well, and more about doing less badly if something really bad happens.
In a post-QE world where money is sloshing around and there’s not a lot of obvious value, the only way investors can access higher returns is by being prepared to take more risk. Buying riskier assets comes with increased volatility and the potential for loss. But with so many investors all reaching for yield, there is a growing demand for risky assets. And while that demand persists, asset prices should be supported — if increasingly precariously.
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One way of taking a (somewhat) calculated risk is buying on profit warnings. This is an approach that fund manager Alastair Gunn of the Jupiter Distribution Fund range has been adopting in recent times.
He explains: “The market’s expectations are very high and the risk of disappointing means stocks can fall massively on profit warnings. Companies that have had two or three profit warnings typically suffer a massive de-rating and expectations plummet. If you can find a company with a sensible-looking balance sheet that pays a dividend which still looks sustainable, and where expectations have fallen to the floor, just delivering in line with expectations the next time the company reports is the start of rebuilding the share price.”
Mr Gunn refers to this as “self-help” and explains that, with QE distorting the macro picture, it is more down to what individual company management can do, and what levers they can pull to drive profits growth. He bought housebuilder Bovis and cyber security company NCC on this premise. Both companies warned on profits in February, and have seen their share prices rise by nearly 20 per cent and 76 per cent respectively since then.
Sound uncomfortably risky? Consider the fact that those so-called port-in-a-storm companies — including names such as AB InBev, Bayer and Reckitt Benckiser — have increasingly high borrowings, thanks to huge acquisition deals. Expectations for these companies are high and so too are their ratings — with management already pulling a lot of levers, the potential for self-help is lower.
Beyond taking more risk with your money and looking for companies that can pull their own socks up, the key to securing decent returns in the post-financial crisis world is diversification. The story of eggs and baskets is well-worn. But on valuation grounds alone, spreading your money across different asset classes is sensible, not least for UK-based investors who are likely to see further softness in sterling going forward.
Diversification, adjusting your appetite for risk and looking for companies where the market’s expectations are low and the business’s ability to provide self-help is high, are all useful strategies to do “less badly” if markets take a turn for the worse.
If that all sounds rather depressing, the glass-half-full argument is that with policymakers still maintaining a “do whatever it takes” attitude 10 years on from the start of the crisis, global economies will continue to pick up. A good example of an economy finding some momentum is Europe, which should provide some incremental extra global growth. It just goes to show — you can always find something to celebrate.
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