Crisis 10 years on – what’s changed

This month marks the 10th anniversary of the opening rounds of the great financial crisis. Though years in the making, it was finally in June 2007, that two Bear Stearns hedge funds created to invest in sub-prime mortgages, collapsed. This triggered an attempt by many banks, such as RBS, to shore up their own capital and de-lever. What has the ensuing decade taught us? Certainly, that banks need to be brought under control and that high debt is unsustainable. But, also that it was right to stay in stockmarkets after policy eased in 2009.

Today, economic growth in the crisis-hit economies is still sub-par, and the ratio of global debt to GDP is now at a record high. Indeed, many major economies have higher debt levels today than they had at the start of the crisis. The US Federal Reserve has a $4.5 trillion balance sheet. In the Eurozone, an equivalent of the US Troubled Assets Relief Program (TARP) is still needed to address non-performing loans in the peripheral countries. Without the ability to devalue, or even apply internal devaluation via more austerity, Greece and Italy will find it hard to reflate and repay creditors. And, despite the enthusiasm with which many investors jumped into last year’s “inflation trade”, long bond yields point to subdued inflation expectations. The US Treasuries 5 year/ 5 year forward breakeven rate of implied inflation is back down to 1.9%, its lowest level in 7 months. The performances of Europe’s banking and mining sectors are closely following this unwinding of inflation expectations. The disinflationary forces of technology and low productivity of capital investment are not easily shifted by monetary policy or tax cuts.

Unfortunately, easy monetary policy has encouraged the leveraging of inherently low returns on assets in what are inherently capital-intensive sectors. Many European banks are still not earning their cost of capital. It may take another decade or two before the banking sector resolves its fundamental problems. The lesson may be to avoid leveraged low-growth businesses, with better prospects in companies that have core strengths to protect margins. Meanwhile, new growth businesses are emerging across a range of sectors which can use capital-lite strategies to grow.

Technology has now overtaken banking as the best performing sector in the US and Europe, although Europe’s technology exposure is much lower than the USA. Indices have significant weightings in legacy businesses that are challenged by low inflation and business disruption. This makes a strong case for active management to focus on sound business structures.  For the bank sector as a whole, risks remain elevated.

 
Disclosure: The opinions expressed in this article are my own, and may not represent the views of any firm or entity with which I am affiliated. The information presented in this article has been obtained from sources believed to be reliable; however, I make no representation as to their accuracy or completeness and accept no liability for loss arising from the use of the material. Articles and information do not represent investment advice.

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