Ten years since the financial crisis, what has changed and where are we now?
Back in August 2007, BNP Paribas suspended three funds because of problems in the US subprime mortgage sector, something investors had not much considered until it was revealed as the lynchpin of an unfolding crisis.
Less than a month later, there was a run on Northern Rock after the bank asked the Bank of England for a bailout.
A decade on from the global financial crisis, marked as the day in September 2007 when there was a run on Northern Rock, the financial landscape has changed dramatically.
Research from Fidelity International has highlighted 10 notable trends in the investing and personal finance.
Best performing assets since the crisis
The best performing asset class over the last 10 years has been high yield bonds, with a return of 217 per cent. Emerging market debt and US equities complete the top three best performers. At the bottom of the chart is commodities, down 21 per cent, cash, returning 17 per cent, and UK equities, up 68 per cent over the decade.
Tom Stevenson, investment director for personal investing at Fidelity International, said: “The analysis of the returns of the various asset classes over the past ten years throws up some interesting findings.
"For example, and somewhat surprisingly, the cumulative returns of high yield bonds and emerging markets over the past decade have pipped US equities.
"Bonds have benefited from the collapse in interest rates in the wake of the financial crisis but without first suffering the savage bear market that equities experienced in 2008 and the start of 2009.”
Cash vs. stock markets
With interest rates so low for so long, and inflation ever present, it is no surprise that the difference in returns on cash versus equities has been striking.
A £10,000 pot of cash would be worth £10,460 ten years on from the financial crisis, while the same amount invested in the FTSE All Share would have returned £16,846.
This is despite the dramatic stock market crash in late 2008, the eurozone crisis and several political risk events of the past ten years.
UK sectors performance
A comparison of sector performance in the UK market over the last decade reveals a large dispersion of returns.
Of the MSCI sectors, IT was the standout performer, delivering 281 per cent, followed by consumer staples, up 184 per cent. UK financials, on the other hand, booked a loss of 13 per cent over the period, and materials made only a small gain of 3.5 per cent.
Mr Stevenson said: “The dispersion of returns over the past ten years makes another strong case for holding a well-diversified portfolio.
“This data also shows how stock market returns are to a large degree determined by the price an investor pays at the outset.
Buying at a low valuation stacks the odds in your favour, while paying over the odds makes it very difficult to generate an acceptable return over time.
Ten years ago, financial stocks were flavour of the month and unsurprisingly they have performed badly over the subsequent decade.
"Technology stocks, by contrast, were still in the early stages of recovery from the post dotcom bubble slump. Buying while these shares were in the doldrums set up a bumper decade of returns.”
Stocks & shares Isa allowance
The Isa allowance has risen steadily from £7,200 in the 2008/9 tax year to £20,000 today.
Ms Currie said Isas have grown to become one of the most attractive and generous savings vehicles available to investors today.
“Since 2015, spouses or civil partners can inherit each other’s ISA protection when one of them dies.
"Many couples save from joint incomes, so this change offers bereaved individuals the chance to secure their financial future and enjoy the tax advantages they had previously shared.”
Performance of global stock markets
Of four major global stock markets (the FTSE 100, the Dax, the Nikkei and the S&P 500), the US index has been the standout performer since the crisis, as the US led the way in terms of economic recovery.
Fidelity’s Mr Stevenson said the decisive action of the Federal Reserve helped the US bounce back so rapidly.
“The authorities moved swiftly to slash interest rates, inject cash into the economy via quantitative easing and, perhaps most importantly, recapitalise the banking system. The US is also the spiritual home of the best performing sector over the period, technology,” he said.
However, it is now one of the most expensive markets in the world, and other regions such as emerging markets, Europe and Japan may offer better value, he suggested.
Inflation - UK CPI
The trajectory of inflation has kept the central bank on its toes in recent years.
The rate of CPI has “yo-yoed” over the last 10 years, said Ms Currie, passing the 5 per cent mark as the credit crunch took hold and then falling into deflationary territory in the latter part of 2014 and for most of 2015.
“Today, inflation is creeping up largely due to the weaker pound. Inflation never seems like a problem until suddenly it is. What makes today’s rising prices concerning is that it’s outpacing our pay packets, which means negative real returns. So as each month rolls by we’re getting progressively poorer,” she said.
“Inflation also wreaks havoc with a retiree’s pension savings.”
Wage growth
Weak wage growth has been a key feature of the post-financial crisis world. Since the dramatic drop in wages in the heat of the credit crunch, earnings have flat lined for almost a decade, said Ms Currie.
“Many have pointed to wage growth as the ‘missing piece of the puzzle’, while employment is at record levels - our earnings remain weak.
“This could be down to slack in the labour market - meaning the jobs market isn’t working as well as it should. This is usually down to underemployment: people working part-time who want a full-time job or hidden unemployment: people who are not actively looking for work but who would re-join the workforce if the job market were stronger.
“Other factors impacting wage growth are poor productivity and the rise of technology, and in particular, automation.”
Pension allowances
After two years of rises in the allowances for pension saving after the crisis, it’s been downhill all the way,” said Ed Monk, Fidelity’s associate director for personal investing.
From an annual allowance of £235,000 in the 2007/2008 tax year, and a lifetime allowance of £1,650,000, the annual allowance today is just £40,000 and the lifetime allowance £1,250,000.
"The need to cut costs over the years has led them to dramatically limit the amounts that can be saved.
“Before the crisis, the top limits on pension savings were a concern only for the very rich but now many without extravagant earnings can fall within their scope.”
The value of the pound
Sterling’s slide against the dollar since the crisis has been significant, and the vote for Brexit did not help matters.
Fidelity’s Mr Stevenson noted sterling has been “on the back foot” since the referendum, but it has traded in a range between $1.20 and $1.30 for the past nine months or so, shrugging off a deterioration in economic conditions and intensifying political concerns.
“That suggests to me that the bottom may have been reached versus the dollar. Against the euro things may well get worse before they improve, however. The economic outlook in Europe is better and there is much less political uncertainty.”
