Which Investments Best Survived the Financial Crisis?

Psigma CIO Tom Becket tells Emma Wall the quantitative easing fuelled rally of the past decade will not be repeated over the next

Emma Wall 24 August, 2017 | 12:51AM
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Emma Wall: Hello and welcome to the Morningstar Series "Market Reaction". I'm Emma Wall and I'm joined today by Psigma's Tom Becket, to discuss the last 10 years of investing marking the 10 year anniversary of the beginning of the global financial crisis.

Hello Tom.

Tom Becket: Hi Emma.

Wall: So, 10 years ago we were in quite a good place sentiment wise, not knowing that around the corner the global financial crisis was about to hit. But let's propose that you held your nerve and you didn’t take any money out of the market, as many people did and that you'd ridden the waves over the last decade. Which have been the best performing investments?

Becket: I think if you just stuck with the positions that you had in 2007, you'd almost certainly not be sitting here you'd been fired, because there was such a big drop in asset prices in 2008 and the start of 2009. That if you were savvy enough to do anything you probably sold when assets looked expensive in 2007 and bought them back cheaper 18 months, two years later.

Now not everyone did that and in fact one has to admit that with your investment strategy you still held on to assets throughout that period that probably dropped significantly in value. But what you'd find now is actually the best falling asset classes have been some of those which performed worst actually counterintuitively in 2008.

Things like global credit, U.S. high yield credit would be a mainstay feature amongst the best performers and European high yield credit despite what's happened in Europe over the last few years. In addition, U.S. equities which were obviously significantly overvalued in 2007 hit hard in 2008 and 2009, but have recovered extraordinarily strongly nearly 300% since the depth of financial crisis, making them one of the best performers over the last 10 years. So I think if you'd held your nerve it would have been very rocky time if you'd bought astutely in 2009 you probably had wonderful last seven or eight years.

Wall: And what about the worst performers since then, because it's really shaken down into two camps, isn’t it?

Becket: I think that’s right. I think, think back to 2007 and into 2008 those things which were most on vogue back then were probably things like commodities and emerging market equities. If you think back to the commodity bubble that we saw in 2007, 2008 that encompassed everything from oil all the way through to soft commodities because China was going to buy the world and they wanted exactly the lives that we had.

Those things might well be true, but it took longer for those trends to play out. They obviously had an incredibly poor time in 2008, recovered somewhat until 2011 and then have struggled ever since then. So, commodities are probably amongst the worst performers. Emerging market equities are symptomatic of the high levels of volatility we've seen in the last decade, very much on vogue, absolutely hated, absolutely on vogue and for last few years until the start of 2016 hated once again. But maybe towards the bottom on a passive basis of those things which have done badly over the last 10 years.

And contrary to the massive amounts of enthusiasm and I think the complacency towards European equities we are seeing now European equities were much in the doldrums by the end of 2015 and now started to recover. But I think maybe bringing up the rear of the equity markets that we have seen in the last decade.

So, I think most assets have performed pretty well in the last 10 years. It's been a rising tide floats all boats rally, but certainly there has been winners and losers amongst the main asset classes.

Wall: And how much of those winners is down to central bank policy, because you seem to be commenting there that quite a lot of things are paying income have done very well, developed market equities with the exception of European stocks have done very well. Is that all due to some of the global volume of quantitative easing that we've seen across the market?

Becket: I think you put that into a number of factors. Let's be completely honest about it. Assets have performed well over the last 10 years, and in particular since the bottom in 2009 and more recent bottoms in some asset classes at the back end of 2015, because certain assets were cheap. Let's bring into sort of more short-term context, 2016 was a great year for emerging market equities, emerging market debt, European equities, U.S. high yield credit, commodities, why, because those assets were cheap. And as you look back to 2009, and we're in the same sort of place back then.

So valuations have played a part in that. Likewise, the global economy might have gone through a sort of Nike tick recovery, big drop and a really quite slow truncated recovery there afterwards.

But the economic conditions have been getting better. But I think you quite astutely pinpointed the main culprit or the main positive driver behind the returns over the last few years, and it's undoubtedly been the aggressive and high proactive activities taken place by the central bankers around the world, who've inflated most asset prices, all the way from financial assets to I would say things like footballers prices, though pumping the economy of loads and those cheap debt and really trying to cure the global financial crisis worst ills, the debt bubble, with yet more debt.

And I think that's the thing which is making most worried at this point in time about the outlook. Many assets have been inflated because of central bankers. And really the whole free market equilibrium of trying to find an asset market's right price has been distorted by their actions. So, no small part is being down to the central bankers.

Wall: And now they are unwinding that or indeed promising to unwind that. Does that mean that we will see a reverse in fortunes? I think we've already started to see, you mentioned the European equities have started to come back into favour and indeed rise in value. You've mentioned emerging markets over the last year have started to do the same. Should we expect the losers of the last 10 years to be the winners of the next?

Becket: Yeah, and – it's a difficult question to answer because we really are now in unchartered territory. But the U.S. Federal Reserve and the European Central Bank and the Bank of Japan, the three biggest contributors towards global QE are about to pursue different courses of actions, if you take them at face value, which I don't.

But let's just assume, that the Federal Reserve are going to start quantitative tightening and clamping up interest rates, I think that will be a more difficult environment for U.S. assets. Certainly, yes, and I think that some of the easy money will start to come out of those assets.

Now the question, that you quite rightly asked is, all that money then start to find its way into Europe, into other parts of the world. And I think it has done already, but I find it very difficult to make an argument that even assets in Europe are cheaper at this point in time, actually European equities aren't cheap and there's a lot of complacency. And European high yield as an example, now has a yield on the index of about 2.1%.

We're talking about European junk bonds, that's a yield below that of U.S. Treasuries on a 10-year type bond. So, I'm finding it really hard to find value and I find the Central Bank argument of loose money very difficult now to justify as a reason to be very on-risk in your portfolio.

If you can marry up central bank access with cheap valuations like we could at the start of 2016, then by all means, take a lot of risk, be very on-risk, try and buy, assets are cheap. Now 18 months, 20 months forward from a wonderful buying opportunity that started last year, I'm finding that really difficult, whether or not the central bankers actually do retract their quantitative easing programs, it's a very difficult investment environment out there.

Wall: Tom, thank you very much.

Becket: My pleasure. Thank you.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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