David Semmens, head of investment strategy at online investment service Wealthify, discusses six lessons we’ve learned ten years on from the 2008 financial crisis
This week marks ten years since the collapse of banking giant Lehman's Brothers and the start of the global financial crisis. So what have we learned over the past decade?
This time was different, in the same way
The financial crisis of 2008/09 saw the FTSE100 drop quicker and by further than at any time since Black Monday. But this round of extreme market volatility was more two-sided. Out of the FTSE 100’s 10 largest one-day drops, five were in 2008 and four in 1987, but of the largest ten-day rises, seven were in 2008 and only one in 1987.
Since March 2009, the FTSE has more than doubled and with dividends reinvested, almost trebled. This recovery not only reflects the importance of seeing investing as a long-term proposition, but also the need for asset managers to combat behavioural biases that saw investors crystallise losses by panic-selling when valuations were at their lowest.
Low interest rates mend but don’t cure
Since the financial crisis, broadly speaking, global equity markets have risen strongly, whilst bond yields remain significantly below their pre-crisis level, more than 300bps lower in the case of Germany and the UK. This historically atypical market movement was largely driven by Quantitative Easing (QE) coupled with the lack of a credible inflationary threat.
But while economic growth normally brings with it rising inflation, this recovery has been anything but typical. The Bank of England recently boosted interest rates to 0.75 per cent, the highest level since 2009.
This trend towards small, gradual rate hikes, given the lack of sustainable inflation, wage or core CPI, is not expected to change. However, it also leaves the BoE with few tools (conventional or otherwise) with which to combat the next recession.
Disruptors have flooded the financial world’s economic moats
The global financial crisis has transformed the financial world. As well as facing increased public distrust and stricter regulations, traditional UK and European banking services are now being challenged by a growing wave of newcomers seeking to democratise financial services by taking advantage of digital technologies.
This has been particularly pronounced in the UK, with the founding of the financial authorities’ New Bank Start-Up Unit in January 2016. In the UK, fintech start-ups and firms received an estimated £8.3 billion in funding during 2017, and £12 billion in the first half of 2018 alone.
The UK government’s Fintech Sector Strategy outlines how it plans to maintain the UK’s position as a leading fintech hub, through a series of measures to help fintech businesses settle, flourish and thrive, including appointing regional fintech envoys to champion change.
Regulations (and regulators) have multiplied
Somewhat understandably, the global financial crisis eroded trust in banks and other financial institutions, leading governments around the globe to introduce greater regulations to guard against further excesses.
In the UK, the Bank of England is now responsible for supervising individual banks and building societies and runs aggressive stress tests to evaluate banks’ capacity to deal with severe market conditions without government assistance.
Several bodies were formed to regulate UK financial services, such as the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) (both replaced the former Financial Services Authority) and the Financial Policy Committee.
GDP has performed acceptably, pushing unemployment lower
The UK economy shrank more than 6 per cent between the second quarters of 2008 and 2009 - the worst ‘peak to trough’ decline since World War II. However, the UK recession didn’t last long for the economy and GDP has risen more than 18 per cent since troughing in 2009.
The UK economy took until Q3 2013 to return to its pre-crisis level, whilst the US was already there in Q2 2011 and the eurozone took until Q2 2015.
This middling economic performance has been accompanied by a steady decline in the unemployment rate since 2012. UK unemployment rose rapidly during and immediately after the financial crisis, peaking at 8.1 per cent in 2011, but began decreasing steadily 12 months later and reached its current low point of 4 per cent in June 2018.
But average real wages have not recovered, and consumer debt remains high
Despite the recovery being in its ninth year, average real wages are yet to reach their pre-crisis level, consistently falling in real terms from 2008 to 2014, and during most of 2017.
Today, real average monthly earnings in the UK remain 3 per cent lower than they were 10 years ago. The UK’s real wage paralysis has been accompanied by a gradual drift towards higher personal debt, taking average UK household debt from £3,000 to £4,000 in the last decade.
Given anaemic real wages, such an increase shouldn’t really come as a surprise. However, the real issue is that households with too much debt will struggle to save and invest, leaving them ill-prepared for the next crisis.
David Semmens is head of investment strategy at online investment service Wealthify