It’s 10 years this week since the failure of the investment bank Lehman Brothers, the biggest bankruptcy in corporate history. More importantly, it was also the event that set the cards falling throughout the international finance system, sparking a global crisis that many economists rate as the most severe since the Great Depression of the 1930s.
However, despite ravaging the global economy, as tends to be the nature of these things, we’ve generally bounced back strongly. Since the recovery took hold, equities markets and many other asset classes have gone from strength to strength. In a bid to kickstart the economy, interest rates were slashed to record lows and major currencies dropped in value as the result of long term quantitative easing programmes from central banks around the world.
As well, as releasing cheap money into the economy, this also meant that there was little point in sitting on cash, which would have lost purchasing power due to negligible interest rates below inflation. While there may yet still be a sting in the tail from this strategy, it is hard to deny that, while a little extreme, it worked. Desperate times called for desperate measures. Capital hunting returns, both through investment in capital markets and venture capital has seen growth and innovation flourish. Property markets have also largely done well. But which investment classes have delivered the strongest returns over the past decades and which would those investing online have done better to avoid?
Equities, as a broad class, have had one of their longest bull runs in history, officially the longest in the USA. So having not panicked and stayed invested was, in retrospect, the sensible approach. In fact, it has been the sensible approach during all previous stock market crashes which have always seen share prices subsequently recover and move on to greater heights.
The UK has seen values more double since their pre-crash 2008 level and US equities have also spent the last couple of years setting a seemingly unending series of new highs, powered by the success of technology stocks. Investors who bought while the market was at its post-crash low would have made far more still. One caveat to the success of equities since the crisis is that banking stocks are still licking their wounds. The continuing travails of the finance sector has been the combination of just how bad shape the balance sheets of banks turned out to be ten years ago, huge fines levied as a result of poor corporate governance, new regulations around capital requirements and the de-risking and de-coupling of consumer-facing banking and investment banking.
Drilling further down into the UK equities market since the crisis, small and mid-caps have outperformed Britain’s larger companies over the last 8-9 years, though have also seen higher volatility. £10,000 invested in the FTSE 100 pre-crisis would now be worth around £21,000 including re-invested dividends. The same investment in the FTSE 250, £30,000. U.S. equities, fuelled by the giant technology stocks have been the best performing asset class in the world over recent years. The same £10,000 invested in the S&P 500 just before the crisis hit would be worth around £37,000 today. UK IT companies have also done particularly well and an investment in the MSCI UK IT index would have returned 320.8%.
Other strong performing assets have included high yield bonds and emerging markets debt. Overall, investors have enjoyed a very prospective period. Unless you focused on banking stocks, it would have been hard for an investment portfolio to not do extremely well. The sun can’t shine so strongly forever though! Investors are likely to have to work harder for their returns over the next 10 years. Luckily we’re here to keep you up to date!