As the summer of 2018 draws to a close, our minds turn back to the financial crisis of a decade ago. Those events were so momentous in their impact on the global financial markets, economy and society that we still feel the aftershocks today. Investors and policymakers are still grappling with the effects of the crisis and the unprecedented response.
That is why we used this anniversary as an opportunity to engage with colleagues from across Neuberger Berman, not just to reflect upon the crisis and its aftermath, but more importantly to draw upon the countless conversations we have had with clients and company management teams from around the world to look to the future.
A Look Back
The 2008-09 crisis shocked stock markets, but its impact on debt markets was unprecedented. The 55% plunge in world equity markets was extremely painful, but within historical experience. By contrast, the catastrophe in credit markets - beginning in U.S. subprime mortgages, sending high-yield credit spreads above 2,000 basis points, and culminating in a European sovereign defaulting on an IMF payment - was an unparalleled and scarring experience.
Policymakers' responses to the crisis were equally unprecedented. Major central banks adopted vast quantitative easing programs and, in some cases, negative interest rates. Regulatory authorities overhauled swaths of banking and market regulation. Government balance sheets groaned under the weight of trillions of dollars of debt taken on from the imperiled private sector. Some, such as the U.S. and China, added substantial fiscal stimulus. Others implemented austerity measures, which in the case of the euro zone revealed structural weaknesses that remain unaddressed.
U.S. GDP contracted by more than 4% in the 12 months to the second quarter of 2009. Even the global economy shrank by 2% that year. Over the next five years, unemployment peaked at 10% in the U.S. and 11% in the European Union. Youth unemployment in the EU hit 24%.
This unleashed significant social tensions. As the emerging economies opened to trade through the 1980s, '90s and 2000s and became the workshop for the world, cheap goods and cheap credit disguised the fact that the developed world had exported many of its manufacturing jobs. Inequality within countries grew even as global inequality diminished. The financial crisis revealed how unsustainable it was to use consumer credit to paper over the widening cracks.
As if all of this were not enough, the financial crisis and its aftermath coincided with an epochal change in the technological environment, from the arrival of smartphones and social media, to the spread of automation, artificial intelligence, and "big data." This unleashed a wave of disruption as nearly every business model in every industry, from retail to media, from transport to finance itself, came under tremendous pressure to reinvent itself or die.
A Look Forward
We imagined ourselves 10 years from now. What are the forces that would still be driving the investment world, and what would have been dismissed as mere noise? We agreed that four big trends will still be shaping the economic and financial landscape.
- The explosion of debt throughout the world, taken on by both sovereign and corporate borrowers.
- The transition from the east-west world order of the 20th century, and the north-south arrangement of the past 30 years, to the genuinely global, and yet also more fractious multipolar world order of the future.
- The restructuring of financial and capital markets, a wave of disintermediation of the banks and public equity and bond markets that dominated the past century.
- The growing economic importance of technology.
We argue that all of this has propelled us into a new era in which some longstanding divides are being dissolved: divides between governments and markets, between the emerging world and the developed world, between the public markets and the private markets, between human and machine. Those dynamics lead us to our 10 key investment implications and five guiding principles for investors that we set out at the end of this project.
Our 10 Investment Implications
- Readying for the cyclical opportunity in corporate debt downgrades.
- Re-thinking risk diversification in long-term investment portfolios.
- Sharper distinctions between passive, smart beta, quantitative and active management.
- Emerging markets will go mainstream.
- The Great Disinflation may be over.
- Private assets are becoming more essential - and more flexible.
- Diminished banks mean more opportunities for investors.
- Thematic analysis will be more important for active investors.
- Big Data will define our economic ecosystem and transform investing.
- ESG analysis will be fully integrated into investment processes.
From these specifics, we believe that there are five guiding principles to take away:
- Accept the new reality of lower market returns, higher volatility, and higher correlations.
- Pursue the full passive-to-active spectrum.
- Embrace private as well as public markets.
- Create an institutional governance structure that enables nimble opportunism.
- Look for more from asset managers.
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