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Investment Markets - is there still an opportunity?
By: Richard Renfrew
The period October 2007 to March 2009 is referred to as the Global Financial Crisis (also referred to as GFC - Gone For Coffee). During this period the US markets (in US dollar terms) dropped 57%, the worst fall since 1929. Since then the share markets have strongly rebounded, S&P 500 up 68%
It is important to note that a 57% drop requires a 133% gain to get back to square one.
In brief, the GFC was caused by mainly US banks lending to anyone with a birth certificate. Investment banks were creating, mass producing and securitising NINJA Mortgages (NINJA - no income, no job aspirations) and selling them to the world.
How have share markets recovered after other bear markets?
The table below shows share market gains after the first year once markets bottomed and for the following year.
Bear Market | Decline in | Gain in first year | Gain in second year after low (%) |
May 46-Jun 49 | -30 | 42 | 4 |
Aug 56-Oct 57 | -22 | 31 | 10 |
Dec 61-Jun 62 | -28 | 33 | -2 |
Feb 66-Oct 66 | -22 | 33 | -2 |
Nov 68-May 70 | -36 | 44 | 11 |
Jan 73-Oct 74 | -48 | 38 | 21 |
Nov 80-Aug 82 | -27 | 58 | 2 |
Mar 00-Oct 02 | -49 | 34 | 8 |
Average | -33 | 39 | 8 |
Oct 07-Mar 09 | -57 | 68 | ? |
Source: Bloomberg, AMP Capital Investors
Where will the markets head?
Its likely 2010 will also be a good year for the markets, albeit with increased volatility. Since the beginning of the year we have seen international share markets fall back 7.5%. This was triggered by a number of events, concerns with the Greek economy and its impact on Europe and the UK - a number of UK institutions have exposure to Greek bonds. There were also concerns when China said it would try to control its economy to avoid speculative bubbles. Things got worse when President Barack Obama announced plans to curb trading by large financial institutions.
While the Greek economy is small, that country's yawning budget gaps were undermining faith in the Euro, Europe's common currency. World markets reacted to Greece's problems on concerns that it would spread to other debt markets.
This week the EU has agreed to bailout Greece. Share markets have responded favourably and are up around 2-3%.
The debt problems Dubai was experiencing late last year have passed with Abu Dhabi agreeing to provide financing. Property prices in Dubai have fallen as much as 50%.
It is expected that countries will slowly unwind the rescue packages put in place as a result of the GFC towards the end of the year. So its expected share markets will pick up as growth in economies and businesses pick up.
It is likely we will see some major strengthening in the US dollar which will mean a fall in the NZ dollar is likely. The international component of portfolios will benefit from this.
What has resulted from the GFC is an accelerated change in the positioning of world economies. Ten years ago the US market made up 55% of the capital value of world markets. Today it is more like 30%. It is very likely we will be seeing strong growth in the emerging economies, referred to as the BRICK economies. The BRICK economies are Brazil, Russia, India, China and Korea. We are increasing weightings in our portfolios to these economies.
Globally, interest rates will start to creep up from mid year but world governments will need to tread carefully to avoid any stalling in economic recovery. Australia had three interest rate increases last year but did not raise rates earlier this month. The Australian economy is one of the few economies to escape recession; having only one negative quarter (two back to back negative quarters define a recession).
We believe that because consumers were feeling nervous about the world economies, employment prospects and talk about another great depression, discretionary spending was put on hold. Well the economic Armageddon didn't happen. Big ticket items such as purchasing new cars, white ware, holidays, changing house etc were put off being purchased until later. To us this means there is a lot of pent-up purchasing power in the world economies and as confidence resumes then these delayed purchases will start happening. This will also fuel the economies.
We are optimistic for another strong year in investment markets.
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