Reflections

19th September 2012

Four years have passed since the beginnings of the global financial crisis - the worst in the post war era. To many fund managers, investors, global leaders and central banks it must feel like more than a lifetime. When Lehman Brothers filed for bankruptcy in September 2008, the world quickly slid into a systemic financial meltdown which we have been trying to recover from ever since. `

From time to time, it is helpful to sit down and reflect on just how far we have come since the equity market lows of 3rd March 2009, when the FTSE 100 Index closed at 3,512.09. Since then the market has recovered over 60%, hovering below the 6,000 level, but standing far short of the previous peak of 6,730.70 where it closed on 12th October 2007.

 

These past four years since the start of the crisis have been quite a white knuckle ride - but in three clear and separate market stages. First, the sell-off, from September 2008 to the market low the following March. Credit markets and trade froze, sending the global economy into a recession. With the resulting aggressive and unprecedented global monetary and fiscal stimulus, interest rates remain at record lows today. The financial markets declined sharply, with the FTSE 100 Index losing almost 40% during this initial stage, whilst government bonds and gold benefitted as deemed safe havens for fearful investors.

 

The second stage was the strong market rally from March 2009.  This lasted over a year as world leaders and their central banks bailed out the banking system to stabilise the financial markets. The FTSE 100 Index rebounded to 5,825.01 (+60.0%) - a similar level to today - and other cyclical asset classes improved as the continued monetary and fiscal stimulus kick-started an economic recovery. Although most investors were rewarded in this stage, it took a courageous approach to participate as the markets had been plummeting in early 2009.

 

The final stage, what we have been living through since then, has been the most volatile phase - the so called "risk on/ risk off" market. Initiated by the first signs of trouble in the Eurozone as the Greek economy was bailed out, fears of contagion then spread bringing into question the viability of the single currency without fiscal and political unity. Treasuries, Gilts and Bunds have been a profitable trade as the majority of equity markets have been swinging within a range with the further deterioration in the Eurozone, a stumbling US recovery and fears of a hard landing in China. With each significant decline in business confidence and financial markets, policy makers have shown a willingness to intervene with further stimuli of ever increasing magnitude. Quite recently the ECB announced its intention to defend the Euro at all costs, whilst the US Federal Reserve expressed its determination to reduce unemployment with further unlimited money printing. This is big policy and we may have entered the next market stage. Until then, whilst the global economy is deteriorating, equity valuations are cheap and liquidity will trump all in the medium term.