Is an­other fi­nan­cial cri­sis just around the cor­ner?

The Star Malaysia - StarBiz - - Bizwealth - By Tee Lin Say

IT has been 10 years since the start of the Global Fi­nan­cial Cri­sis.

Psy­cho­log­i­cally, this is an­other fac­tor which puts some fear into in­vestors. How can a mar­ket sus­tain its up­trend with­out a cor­rec­tion once every 10 years?

In end-2007, trig­gered by a col­lapse in the US hous­ing mar­ket it caused the deep­est re­ces­sion in liv­ing mem­ory and the near-col­lapse of the fi­nan­cial sys­tem.

Banks failed, gov­ern­ment in­sti­tu­tions were bailed out, stock mar­kets crashed and coun­tries had to be propped up fi­nan­cially.

Schroders In­vest­ment Man­age­ment Ltd says “we are still feel­ing the ef­fects: low growth, po­lit­i­cal up­heaval, Brexit and even the elec­tion of Trump can all be traced back to the cri­sis”.

One of the most sig­nif­i­cant ef­fects of the cri­sis has been the long and steady fall in bond yields.

Ja­panese, Ger­man and UK bond yields re­main be­low 1%, which re­flect in­vestors’ view on the out­look for in­ter­est rates in those re­gions. US bond yields have climbed above 2% as the Fed­eral Re­serve has be­gun to raise in­ter­est rates.

How­ever, the knock-on ef­fect of cen­tral bank at­tempts to stim­u­late economies has sent stock mar­kets charg­ing back. US stocks have risen more than 260% since the cri­sis’ low point in March 2009. UK, Euro­pean and Asian stocks are all up more than 150% in the same pe­riod.

Also, the VIX in­dex, also known as the “fear gauge” is now at his­tor­i­cally low lev­els, As govern­ments and cen­tral banks in­ter­vened to stem the flow of the cri­sis the VIX sub­sided.

Con­fi­dence among in­vestors grew. Schroders says that this in­di­cates that in­vestors see noth­ing on the hori­zon that will cause ex­treme mar­ket volatil­ity.

“Low in­ter­est rates and the ef­fect of money be­ing pumped into the econ­omy has ben­e­fited busi­nesses and there­fore the stock mar­kets on which they are listed,” says Schroders.

Schroders fund man­ager and multi-man­ager Joe Le Jéhan says the key to nav­i­gat­ing the fi­nan­cial cri­sis was be­ing alive to the warn­ing sig­nals that were ev­i­dent across mar­kets in the pre­ced­ing months.

“If we avoid sig­nif­i­cant losses, we should be in a po­si­tion to take ad­van­tage of cheaper val­u­a­tions when the op­por­tu­nity arises, rather than nurs­ing our wounds. We strongly be­lieve that it’s this will­ing­ness to ac­tively man­age risk that al­lows in­vestors to com­pound strong re­turns over the longer term,” he said.

Je­han said that dur­ing the fi­nan­cial

We strongly be­lieve that it’s this will­ing­ness to ac­tively man­age risk that al­lows in­vestors to com­pound strong re­turns over the longer term.

cri­sis, this meant hold­ing very few eco­nom­i­cally sen­si­tive eq­ui­ties, avoid­ing ar­eas like fi­nan­cials and us­ing as­sets like gov­ern­ment bonds to pro­vide some up­side as most things fell in value.

“While such a con­cen­tra­tion on cap­i­tal pro­tec­tion is vi­tal at the end of all cy­cles, this cy­cle has been quite dif­fer­ent. So, what we can use to pro­tect port­fo­lios this time may well also dif­fer,”

“Gov­ern­ment bonds – his­tor­i­cally a more ob­vi­ous safe haven – may not of­fer the same op­por­tu­nity this time around. This is why it is worth look­ing at the few as­sets that look rel­a­tively un­der-val­ued and/or have the po­ten­tial to pro­tect should mar­kets en­ter an­other stormy patch.

He said that these as­sets might in­clude cash to help dampen volatil­ity and pro­vide that op­tion to in­vest at cheaper lev­els when the buy­ing op­por­tu­nity re­turns. The other as­set to look at is gold, which also has the abil­ity to make money should eq­uity mar­kets fall. —

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