Ten years ago markets were looking expensive and a correction seemed due. How times have changed.
Well not exactly. A lot has actually changed over the past ten years but markets have ended up in a somewhat similar place to where they were following a long bull run, certainly on the equities side.
Hopefully, not on the credit side.
While not every lesson from the financial crisis has been comprehensively learnt we are in a better position to withstand a downturn than we were in 2007, particularly in terms of the banks, which have been forced to stash away cash reserves for a rainy day in a way that they weren’t before.
Customers queue up to withdraw their money from Northern Rock in 2007.
That’s not to say another financial crisis can be ruled out, and it will never be possible to do so, but if there is to be one again at some point it will take a different form to the 2007 and 2008 version.
While people are quick to hail the ten year anniversary of pretty much anything, it is a bit of a stretch in this case.
The financial car started skidding in 2007 when US sub-prime lender New Century Financial filed for bankruptcy in April and there was a run on Britain’s Northern Rock in September, but didn’t really come off the road until the summer of 2008 when events culminated in the collapse of US bank Lehman Brothers.
In this instance, the ten year anniversary of the credit crunch being discussed this week refers to 9 August, 2007, a day when French giant BNP Paribas shuttered some of its funds related to sub-prime mortgages, the ECB injected €95bn into the markets, while the US Fed also added temporary reserves.
Short of any particular day that marked the start of the credit crunch, the financial world has since decided this one will do.
Notwithstanding this, whichever starting point you think is most appropriate it is true to say the crisis also represented one of the best buying opportunities for investors we have seen in history.
It is therefore an opportune time to run the rule over the various asset classes and take stock.
Doing so reveals that nearly all have seen strong returns over the past ten years, but some considerably more than others.
Fidelity International has done the maths and come up with this – a table that shows all assets have gained, except for one – commodities.
Total percentage returns for major asset classes over the ten years since the crisis.
As you can see, types of bonds account for three of the top four, while US shares have trumped all other equities classes by a distance.
‘The analysis of the returns of the various asset classes over the past ten years throws up some interesting findings,’ noted Tom Stevenson, investment director for personal investing at Fidelity International. ‘For example, and somewhat surprisingly, the cumulative returns of high yield bonds and emerging markets over the past decade have pipped US equities.’
Languishing at the bottom as the only asset class to lose investors money over the ten years is commodities, which begs the question is it the best buying opportunity now?
Cash has fared little better in the low interest rate world, highlighting the folly of leaving all your money in savings accounts.
Of course bonds could be seen as a false winner, like an athlete on steroids.
The steroid in question being those rock bottom rates and the slumping yields that resulted.
With bond yields and bond prices always going in opposite directions, the asset class has effectively been pumped up by central banks and has little to do with the performance of the companies issuing the debt.
‘Bonds have benefited from the collapse in interest rates in the wake of the financial crisis,’ added Stevenson. ‘But without first suffering the savage bear market that equities experienced in 2008 and the start of 2009.’
These two charts produced by Schroders and Fidelity International respectively illustrate the point.
Bond yields consistently slid over the ten years until 2016, pushing up valuations.
Rates were slashed to near zero when the crisis took hold and have barely moved since.
Moving away from broad asset classes to delve into the performance detail slightly more, there has also been significant variation in sectors in terms of their returns over the decade.
The likes of healthcare businesses and consumer staples producers have outpaced telecoms firms, utilities, energy companies and banks by a distance as this chart from Schroders shows.
There has been a wide variation in performance of different sectors over the decade.
‘Banks were left alone by investors for good reason; no one knew what toxic assets they still owned,’ said Schroders’ David Brett.
‘However, they have done much to rebuild their businesses over the last 10 years. So, is now the time to re-evaluate the case for investing in banks?’
‘European, UK and Japanese banks have been avoided by many investors,’ Brett added. ‘According to their current price to book multiple investors are valuing them at less than the value assets on their balance sheet, compared with 2007 when they were almost double.’
Banks have also suffered from the very thing that has boosted bonds so much; rock bottom interest rates.
With rates on the way up in the US now though and possibly in the UK next year, it could be time to invest.
Predicting what the next ten years will bring for investors with any accuracy is far from an easy task.
One thing is for sure though, if the returns are to be any where near as tasty as they have been over the past ten years investors will be more than happy.