Investing in Times of Uncertainty and Volatility – Part 1 From the GFC to Now

People are worried, concerned and yes, even scared. How do you invest in these volatile and uncertain times? The memories of the Global Financial Crisis (GFC) of 2008-2009 are still fresh. They themselves may have “lost” money during this period as have many of their friends. They know people or have heard stories of people who “went into cash” at the right time.

The global economies and investment markets are again facing new uncertainly and volatility. People are asking themselves and their advisers questions such as:

• Will I lose my money?

• Is any place safe?

• Should I go into cash?

• Am I wasting my money by salary sacrificing into superannuation?

Let’s look at the recent past and where we are now.

In the beginning

The Australian share market peaked at around 6800 in November 2007. Concerns over the American subprime market and the creditworthiness of the debt products arising from these mortgages, Collateralised Debt Obligations (CDO’s), began to appear however the crisis did not reach a climax until September 2008 when the Americans permitted the large investment bank Lehman Brothers to fail. Up to that point the debt crisis and resulting failures of financial institutions in American were contained.

Once Lehman Brothers failed, there was a massive global loss of confidence and lending between even large financial institutions froze as there was a fear that they could not repay their borrowings. Investment uncertainty and volatility increased. Interest rates in Australia and overseas fell rapidly, governments propped up financial institutions, and there were massive government stimulus packages as well as government guarantees over depositor’s funds. The Australian share market hit a low of around 3100 in April 2009.

Some Hope

Gradually the measures in Australia and overseas took effect. Confidence rebounded to some degree and the Australia share market was soon back to 5000. The Reserve Bank began to raise interest rates from the low of 3% to 4.75% by November 2010. Talk was of how soon the federal budget would be back in surplus and how to contain the inflationary effects of the resource boom. Investment uncertainty and volatility decreased and money came back into the market.

The picture overseas was mixed. The BRIC countries of Brazil, Russia, India and China continued to grow at a fast pace as did other emerging and secondary economies such as Vietnam, South Korea, Malaysia, Turkey and Argentina to name a few. Commodity prices rose which has helped Australia as well as the oil rich countries.

Too soon to celebrate

Against this good news the effects of the GFC have had a lasting impact on other countries which have struggled with debt and economies which have not fully lifted out of recession. In Europe the debt crisis spread from Ireland to Greece and then to Portugal and more recently doubts over whether Spain and Italy can manage their debt. Countries such as Germany, which have bounced back strongly from the GFC, are reluctant to fund the mismanagement of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

The big concern however is the effect that a default of even a country such as Greece would have on the countries of the Euro. As 2011 progressed and into 2012, this concern has had a major impact on the share markets.

The other focus of bad news is the debt problems of America and its continuing lack of growth. America has taken on huge debt funding wars in Iraq and Afghanistan, the bailout of financial institutions, a loss of revenue because of tax cuts to the rich and unfunded social security entitlement programs authorised by the Bush administration.

Market panic occurred in July and August 2011 when the debt problems in Europe became more serious and the political brinkmanship in America over lifting the federal government’s debt ceiling brought about a lack of confidence which was brought to a climax when Standard and Poor lowered their rating of American debt. The Australian market had one of its largest falls on 9th August, although it rebounded the same day. Once again investment uncertainty and volatility increased.

Going Forward

Major concerns on people’s minds are as follows:

1. We have a situation where Greece will almost certainly default on its debt, which could spread to other European countries.

2. Economic growth is poor in much of Europe and America however the means to stimulate growth through deficit financing and the lowering of interest rates is not available.

3. America has unique and persistent problems such as falling house prices, a reluctant to raise taxes and the ongoing drain of overseas military commitments.

4. There is friction between China and its trading partners, especially America, over the value of the yuan and persistent trade imbalances.

5. There are special concerns over China such as its continued desire to hold low yielding American debt and the sustainability of its economic model which has been reliant on exports and investments.

  • These concerns are summarised in a fear that we are on the verge of a second GFC. Hence the questions presented at the start of this article.

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