The overstretched Noughties
Dec 24 2009 By Trevor Law
them on to. Rising interest rates induced a slowdown in the business cycle, compounding the problems of a deflating property bubble in many economies.
It was found that during periods of stress, a diversified portfolio of risk assets did not necessarily offer protection, contrary to many investors’ prior assumption. Furthermore, the US authorities challenged the presumption that the larger banks would not be allowed to fail, no matter how weak their balance sheet may be.
In September 2008, Lehman Brothers was allowed to collapse, triggering fears of a systemic banking collapse and a global depression.
Stock markets lurched. Very large injections of public funds into the global banking system and into fiscal stimulus programmes and the creation of large quantities of very cheap money by central banks, finally allowed confidence in the global economy to stabilise.
Stock markets began what was to be a powerful recovery rally in March 2009 that lasted into the winter but the decade ended with many of the problems that caused the bear market still with us, namely excessive amounts of debt.
Large quantities of bank debt have been nationalised, adding to government budget deficits that are in any case straining from a collapse in tax revenue and an increase in welfare payments. Meanwhile, British households remain over-borrowed by historical standards.
So what of the coming decade? It seems inconceivable that financial markets will be able to return to the levels of risk-taking that were common in the mid-2000s. However, there has been little real movement from world leaders to regulate against the worst excesses.
At the same time, bankers appear to be showing little contrition or much change in how they do business.
I don’t think it takes a genius to see that there will be another serious financial crisis in the coming decade. It will probably be caused by a trading system or financial instrument about which we know nothing at the moment. A more serious issue may come from a major currency crisis or the de-rating of a large Western economy.
However, it won’t be all doom and gloom for the investor. Demand in the west may remain sluggish for a few years, but there is no reason to think that the likes of China, India and Brazil will not continue to grow strongly over the next ten years.
Although there may be a fair amount of volatility, investments in these areas are likely to outperform Western markets. Having said that, if you invest in western companies with strong export links to these areas, you are likely to do well.
Away from equities, one area which may well see steady returns over the next four or five years is commercial property, basically because prices fell so dramatically from mid-2007.
The benefits of a diversified investment portfolio may not have been apparent over the last ten years, but it still would have protected you from the worst of the stock market falls.
Going forward, it will still pay to diversify, but that will mean diversifying into the rapidly emerging economies of Asia and South America as well as across asset types.
* Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers located near Solihull. E-mail: tilaw@montpeliergroup.com
