28 November 2017

The Financial Crisis - Ten Years On

It is ten years since the big disruption known as The Financial Crisis. That's when we saw the end of Northern Rock, interest rates start their nosedive, banks having to be propped up, and a general large dose of uncertainty.

A bit of history...

It was the first time that the Bank of England had reduced the base rate below 2%. Quantitative Easing was introduced which had the result of reducing the income (yield) on fixed interest bonds - and they have continued to fall. Stock markets fell, too - 30 - 40% generally - with Europe and Japan particularly badly hit. Ongoing Euro uncertainty was one result of all this.

Banks in the US and elsewhere with exposure to unsafe lending found they had been putting profits before prudence, sales before security.

And the long term impact?...

Fixed interest bonds had been the mainstay of pensions, providing a secure income for the long term. But with falling income, that has become problematic, with many defined benefit pension schemes struggling and closing to new members, and retirees with defined contribution pensions finding that annuities would not provide the return they were expecting.

After the stock market falls, recovery was reasonably fast, though, partly helped by lower interest rates which encouraged company growth. The UK stock market is now around 80% higher than it was at the end of 2007 (dividends reinvested). This meant that many investors switched their attention from fixed interest to equities. Much less certainty exists in that market, but for the time being many felt that you do what you have to!

Changes were introduced to pensions in particular to allow for more flexible access to pension money, such that "Flexi-access drawdown" is often seen as the new norm for taking a pension income.

Lessons to learn?...

The wrong thing to do when a crisis hits is to cut and run. Anyone who sat tight is likely to be substantially better off now, and almost certainly better off than someone who sold to cash.

Active and intelligent management of a portfolio has also been important to take advantage of the changing landscape. A well-spread portfolio investing across different types of asset provided protection from the worst of the falls in 2007-08 and is likely to do so again.

Don't assume it won't happen again. Closer monitoring of institutions and markets, including "stress tests", will help, but next time it will be sufficiently different that yet again we won't see it coming.

Oh, ... and don't rely on the banks! The jury is still out on whether they have learned their lesson on unsafe lending, and other dubious practices. 

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