As a parent with a driving licence I am particularly familiar with the question, ‘Are we there yet?’ With 2015 drawing to a close having been dominated by talk of a rate lift-off by the US Federal Reserve and the Bank of England, it feels very much like the markets have spent all year posing this same question.
The raising of interest rates ought to be seen as a concrete sign that the effects of the financial crisis have been overcome and that markets can begin to return to normality – though not necessarily in sync. Unfortunately the answer to the question thus far has been a resounding (or disappointing) ‘almost’.
We have seen a number of positive milestones: the FTSE 100 index finally closing above 7,000 after flirting with this landmark several times in the past 15 years; the technology-heavy Nasdaq index posting a new closing all-time high, finally recovering from the dotcom bubble of 2000; and the Nikkei 225 index reaching 20,000 for the first time since the year 2000, although still remaining some way off its all-time high of 38,915 from 1989.
These headline indices are pointers in the right direction, but a closer look at the sector at the heart of the crisis can help provide some context as to where we really are.
The epicentre of the credit crunch was the financial sector. To truly say we have ‘arrived’ at our destination requires this sector to be given the all-clear. Technology, which I have already mentioned, is a useful and recent example of a path to recovery given its travails at the turn of the millennium.
Bloomberg data shows that from its monthly peak in February 2000, the Nasdaq index fell 75 per cent over the subsequent 31-month period, at an annualised rate of decline of 42 per cent. The index then recovered over the next 60 months by 130 per cent, or 18 per cent annualised, before being halted by the financial crisis.
Interestingly, the FTSE Financials index fell 70 per cent from its peak in 2007, a 42 per cent annualised rate of decline, and has so far recovered by 123 per cent (14 per cent annualised) over the past 75 months. It now requires a further 60 per cent gain to get back to its previous high.
While there are clear differences between the two sectors, they also share some contextual common ground in terms of their recoveries: structural reform, consolidation, and of course the rebuilding of investor confidence. The key point to take from this comparison is that recovery from a crisis can take a very long time, and investors should expect hurdles along the way.
Similarly, a lift-off in interest rates when it arrives will be a hurdle that the markets must overcome. So back to the all-important question, ‘Are we there yet?’ The good news is, even when lift-off does take place, the journey to recovery will be far from finished – and there will be opportunities along the way. The bad news is there will be plenty more bumps to navigate, too.
Mike Pinggera, head of multi-strategy, Sanlam Four
