When two hedge funds backed by Bear Stearns collapsed in July 2007 because of their exposure to US subprime mortgages, only a handful of people realised this was ‘a dead canary in the coal mine’ event that would lead to a full blown international banking crisis, a worldwide recession and a European debt crisis. The ensuing credit crunch was marked by some key events that will be forever seared into our memories, such as the collapse of Lehman Brothers and the run on Northern Rock Building Society.
Massive bail outs of financial institutions and other palliative monetary and fiscal policies, which became known as quantitative easing, were employed by central banks to prevent a possible collapse of the world financial system. This constant nourishment of easy money has helped to push up asset prices, particularly property and government bonds. Stock markets have also flourished and in most cases, have doubled in value since the lows of early 2009. UK interest rates have tumbled from 5.75% in July 2007 to the current official bank rate of 0.25%. In Japan and Germany, bond yields are actually negative; meaning investors must pay for the privilege of ‘investing’ in short term government debt.
The financial crisis and its consequences irrevocably changed the investment landscape, perhaps forever. Ultra-low interest rates have turned cash, once a safe haven, into a sinking ship. Negative real interest rates mean the amount of goods our money can buy is reduced – bearable in the short term but disastrous over the long term. What cost £100 in January 2008 now costs £122 in real terms, but £100 in the bank then will have grown to just £105 on average – a serious shortfall in purchasing power.
However, the days of cheap, easy money may now be drawing to a close. The key to understanding how the world’s financial markets will perform at a macro level from here on, largely revolves around understanding how growth patterns will evolve in China and the US, the two global economic super powers. Despite what is often reported in the media, for both these countries the outlook is positive and has even brightened over the past 6 months or so. Much of the recent strength in global equity markets has been driven from China.
Despite its size, and already relatively high growth rate, China has surprised many by moving into a period of accelerating growth. This growth is almost certainly a direct result of the policy levers applied by the Chinese authorities in the early part of last year.
Further evidence of an improving world economy is provided by a recent report from the World Bank which states the global economy is gaining a firmer footing, with the US and China leading the way. The bank predicts that the global economy will expand by 2.7% this year and by 2.9% in 2018 and 2019.
There are still threats to this positive scenario, and a correction to the long-standing equity bull market appears almost inevitable at some point. However, this should not in itself undermine what is a fundamentally supportive environment for global equity markets. Ample bank liquidity, lower oil prices, low interest rates and investor demand for both growth and yield are all positive factors which, over time could help to propel equity markets to new highs.
Investment diversification, regular reviews of both appetite for risk and personal objectives and selecting the very best fund managers, all of which are an integral part of the Clarion financial planning service, will ensure that investors gain maximum benefit from the opportunities presented by the changing investment landscape.
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