× Home Modules Articles Videos Life Events Calculators Quiz Jargon Login
☰ Menu

The GFC 10 Years on - Lessons for Investors

Written and accurate as at: Oct 12, 2018 Current Stats & Facts

Saturday 15th September marked 10 years since the collapse of the investment bank Lehman Brothers, the largest bankruptcy in US history.  The sudden collapse of the world’s fourth largest investment bank triggered a full scale panic in global markets.

One Lehman article was from legendary value investor Seth Klarman Here are a few of the 20 insights he gleaned:

Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.


Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell.


Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.

Not that we are expecting another GFC, at around lunch time today the ASX is down 5% on the week – the total sell off from the 6373 high set on the 30th Aug is now -490pts / -7.68%. Clearly a big drop and we could fall further. The DOW Jones has fallen -2052pts to the close this morning or a similar ~7.61%. Worth noting that we do often see big falls at the start of October and more often than not, that provides a great buying opportunity ahead of the most bullish period into Christmas. Time will tell, however that’s our current market view, and we saw many fund managers and brokers played that view by buying stock yesterday when the majority were selling.

Today the market has settled in Australia and around the Asian region despite the Dow Jones falling another -545pts overnight. The obvious question is, what now?

1 – Where is the markets likely “bottom” –  our preferred scenario is we now see a choppy period of consolidation.

This implies we should still buy panic weakness but be prepared to increase cash again into strength

2 – This is an equity correction at this stage, we’re not seeing any concerning movements in the credit markets that matter. Some high yield credit spreads have widened a touch, but not significantly so. Panic is focussed in equities which implies this correction stems from growth concerns.   

While the fundamental picture has not changed, the aggressive nature of selling paints a negative technical picture. This is not generally that surprising i.e. mixed signals during corrections between fundamental and technical measures.

Why such aggressive selling?

Thinking about the reasons underpinning this current pullback, there have been  two major pieces of global macro-economic news that  have gathered momentum over the last few days to undo stocks i.e. rising US – China trade tensions and increasing bond yields (interest rates). Not fresh news but very significant with regard to share price valuations.

In our opinion,  the Australian markets is around fair value but US stocks remain “expensive” even after the last few days declines.  We are adjusting our client’s portfolio’s to diversify International Exposure away from overweight North America.

Remember 3 facts from the September Bank of America Fund Managers Survey:

1 – Cash levels are at an 18-months high hence the buy buttons will be pressed at some stage leading to a strong bounce in stocks.


2 – Allocations to US equities was at an aggressive 21% overweight level – clearly the US has some room to underperform.


3 – Allocations to emerging markets were sitting at 10% underweight, compared to 43% overweight in April, at the lowest level since March 2016 just before stocks soared.

I simply think that investors have been treating US stocks as an almost “safe haven” over recent months, a positioning fraught with danger and one we still believe accurate.

 

 

 

You may also be interested in...

no related content

Follow us

View Terms and conditions