This month marks the 10-year anniversary of Lehman Brothers’ collapse. In the second part of our series, leading fund managers speak to Money Marketing about what we have learned and what still needs fixing after the global market crash of 2008.
Adrian Hull, co-head of fixed income at Kames Capital
Back in 2008, “moral hazard” was a regular phrase bandied around – the worry that bailouts would cause unintended valuations and consequences. We have learned to live with a new generation of moral hazard and today we worry about the effects of the unwinding of quantitative easing. Markets have learned that when central banks choose to do “whatever it takes”, central banks’ fire power is bigger than the markets’.
Central bank watching has become key; markets remain circumspect about the tapering of central bank intervention and we have seen some of the sharpest price reactions when Bernanke, Draghi, Carney or Kuroda have spoken out of kilter with the markets’ understanding of previous comments.
There is an army of repetitive commentators who want to predict the next 2008
The good news is that central banks remain alert to a broad range of factors, which materially decreases the likelihood of a repeat of 2008 and likely dampens any future slowdown. The bad news is that there is an army of repetitive commentators who want to predict the next 2008.
As we saw with Northern Rock through to Lehman, a contorted confluence of events transpired to bring about downfall.
Many of those issues have become “properly” regulated over the past 10 years but it doesn’t stop Cassandra figures predicting some imminent collapse or bond market liquidity armageddon. Having said all this, vigilance is required and that remains key to managing portfolios to likely outcomes rather than outlandish predictions.
It would be bold to claim 2008 as the sole cause of populism, but the interplay between sceptical voters, governments’ austerity and central bank policy will continue to challenge active managers’ resolve.
Peter Elston, chief investment officer of Seneca Investment Managers
The history of financial markets is the history of human beings making the same mistakes in different ways.
This is unsurprising in that there are certain things that never change. Human nature that drives investment decisions is constant; the cognitive biases and emotions that guide our behaviour are hardwired.
The economic cycle will always be with us, which again is driven by human behaviour. Booms are periods in which aggregate consumer and business confidence is on the up, but busts the opposite. So, in many respects, we have learned nothing over the past 10 years. That said, there are probably things that are different. Banks are less risky, evidenced by capital adequacy ratios that are notably higher than they were in 2008.
In many respects, we will have learnt nothing over the past 10 years
But has risk been eliminated? No. Global debt continues to hit new records and is now around 70 per cent higher than it was pre-crisis.
This is not necessarily a problem if interest rates stay low, but they are now rising as central banks respond to rising inflation pressures with tighter monetary policy. There are no imminent signs of a crash but that doesn’t mean they won’t start to appear over the next couple of years. Successful investing is about anticipating trends before others. We have been de-risking and will continue to de-risk our portfolios.
George Godber, fund manager of Polar Capital UK Value Opportunities
Over the past 10 years we have witnessed a fundamental and probably permanent change in financial regulation. The amount of capital financial services companies now have to hold compared with assets deemed risky has increased dramatically. They are more stable businesses now but will face enhanced scrutiny and regulation for a long time to come.
Two direct consequences of the global financial crisis were ultra-low interest rates across the developed world and the unprecedented printing of money in the form of QE.
This is unchartered territory for markets
That is largely coming to an end and interest rates are gradually starting to increase but they are still a long way from being described as normal. The key lesson we have to learn from here is how the normalisation of these two will pan out.
Make no mistake, this is unchartered territory for markets.
Crashes do not usually repeat themselves and tend not to follow on in the same place or come in the same form. Since 2008, regulators have focused their attention on the banks, so if banks blow up then the regulator will have failed. The epicentre of the next crash, therefore, is unlikely to be the banks.
However, we cannot change certain truths about human behaviour. Credit cycles exist and will continue to do so. Markets will often provide capital in a very procyclical way, offering money to businesses at the wrong point in their cycles.
Lauren Wilson, investment analyst at Mattioli Woods
Undoubtedly the 2008 financial crisis has helped shape today’s investment environment. Its marks can be seen clearly across the global market landscape, from asset prices inflated by QE, loose monetary policy, the eruption of populism across the west and a more cautious air from investors who have a greater focus on protection than ever.
Each quarter we are warned that a downturn looms ahead, but markets have shrugged off shock election results, political uncertainty and trade tariffs alike.
This bull market appears to be like Teflon, in that nothing sticks.
As such, it has become a challenge to construct portfolios that will capture some of the soaring equity market upside while still retaining downside protection.
Investors have a greater focus on protection than ever
Bonds and equities have become more highly correlated, so this has led to a surge in popularity of alternatives, particularly absolute return vehicles.
While we utilise some of these funds, it is a difficult area to analyse. Clever marketing ploys can mask inherently low-return strategies which carry exorbitant charges.
Alex Neilson, investment manager at Investec Click and Invest
In the 10 years since Lehman Brothers, we’ve learned that unknown risk is the enemy when constructing a portfolio. We have also learned that, when it comes to picking investments and knowing which ones will perform better in a crisis, research is key. Knowing where and how your money is invested is vital in the modern market so you know how much risk you are taking. Yet, unfortunately, this event is one reason that investing still rings alarm bells for many.
Today, despite a few wobbles, we’re still seeing new market highs as a result of super low interest rates and all the liquidity provided by central banks.
This event is one reason investing still rings alarm bells for many
However, what we are still yet to see is how the world will react to both normalised interest rates coupled with the unwinding of QE by central banks.
Unless markets pick up the slack, we might see government bond yields and discount rates start to shoot up.
Jeremy Thomas, head of global equities at Sarasin and Partners
For those of us investing client money when Lehmans collapsed it is tempting to look back and see that event as a pivotal moment in a career. Banks are required to hold more capital and deploy less leverage than pre-crisis.
Regulatory oversight has improved in most jurisdictions and officials are acutely aware of the link between the solvency of banks and the sovereign.
Banks may be safer than they were, but weaknesses remain. In the UK, the accounting standards for banks perpetuate pro-cyclicality and allow for the inclusion of illusory profits from fair value gains and anticipated profits.
Banks may be safer than they were, but weaknesses remain
Audit quality needs to improve. Banks remain too big to fail.
In most respects little has changed. The global stock of debt is more than 70 per cent higher than in 2007. Central bank policy continues to support markets and housing remains central to consumer wealth.
It is remarkable that the 10th anniversary of the bankruptcy of Lehman Brothers comes just weeks after the S&P 500 index of US companies entered its longest bull market in history at 113 months, surpassing that of 1990-2000. By most measures, equity markets are more expensive now than they were in 2007.
None of these factors alone are indicative of an impending crisis. Potential causes of a bear market could be a bursting of the China bubble or a substantial cybersecurity attack. History suggests crises of the magnitude of 2007/08 are once-in-a-career events.