MONEY MATTERS MONDAY 17TH SEPTEMBER 2018
There’s no Need to Fear the GFC Anniversary!
The financial pages of most newspapers were dominated last week by stories of the Global Financial Crisis of 2008-09. It is supposed to have occurred exactly ten years ago last Saturday, yet the Australian share market peaked on 1st November 2007 and was down 30 per cent by September 2008.
Many stories focused on predicting when the next market collapse will happen, with some suggesting it may be soon. Accurate anniversaries aside, one thing is for sure: the next collapse won’t be on any exact anniversary of the last one.
The GFC was the worst financial market crisis in 75 years, since the Great Depression of the 1930’s. Another collapse as serious is unlikely for a long time. Whenever the next market downturn is, it is bound to be much less severe than 2008-09.
The global banking system is more secure
The global banking system is now more secure with banks holding more reserves. However, in some areas regulation has not been strengthened as much as it should be. For example, global banks trading in financial markets on their own behalf was a big contributing factor. That has not been curtailed.
The risk of a market slump is rising commentators say. We have an upsurge in protectionist policies retarding global trade. The ultra-low interest rates of recent years have caused a jump in asset prices. Values of houses, farms, shares and government bonds are all very high.
Inflation remains extremely low and most economists believe that can’t last. Eventually unemployment will decline causing wage demands to increase, inflation will pick up and interest rates will have to rise worldwide, slowing economies.
Outlook is sound
Despite this, the outlook for the next few years is good. Interest rates remain very low in developed countries with only the US seeing rate rises so far. Inflation is still very low even in the US. Low interest rates mean low borrowing costs for consumers to spend and businesses to expand.
Economies are growing steadily around the world. Company profits are increasing and they are employing more people. When interest rates do rise the moves will be gradual and telegraphed well ahead.
Even though we have trade war troubles more than half of global economic activity is now in services rather than the manufacture and trading of physical goods, so a serious trade war, though undesirable, won’t be a disaster.
However, we should not expect returns as high as those of recent years in the next period. With asset prices higher, the income yields from them are lower and capital growth may be slower. Investment returns should still be sound over the next few years but less than the recent past.
This is general advice and should not be treated as personal advice.
Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.
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