Financial markets have continued to remain extremely volatile over the last couple of days. We’ve been getting a number of queries from clients wondering whether or not we’re heading into a 2008 scenario as it relates to financial markets and the economy. In our view, 2008 was and continues to be materially different to what we’re seeing today. There’s a few key points that we’d like to mention around that.
First and foremost, when we think back to 2008, the financial crisis really started with the illiquidity in financial markets, particularly related to mortgage backed securities and other syndicated loan securities. Liquidity today is very different. Central banks are acutely more aware of the importance of maintaining liquidity in financial markets in order for financial markets to remain open and to be able to trade in an orderly manner. We’re yet to see a situation where financial markets dry up and markets can’t operate. In 2008, that’s exactly what occurred and through that illiquidity and the drying up of the liquidity markets, that flowed through into individual securities, and ultimately into the financial institutions that issued those securities into the market. At the moment, in our view it’s a very different scenario.
The second element to note, in 2008 it ultimately led to a significant housing correction. Now certainly in the US, the housing market, by and large, continues to operate in an orderly and well-functioning manner. Looking at the US, the debt side has certainly reduced over the last decade or so and the way that mortgages have been written has been a lot more tight in the context of the covenants and the lending requirements for borrowers behind that. So again, the environment now is very different to what we saw in 2008, where we saw loans were effectively issued to people that simply didn’t have the ability to service those in the advent of a slowdown, or if they lost their jobs. Locally we see that in the way banks have increased their credit lending standards, and how difficult it is for people to be able to get a loan. So those requirements have made a big change in the risks associated with the housing market and the default risk associated with that as well.
The third element, is that the regulatory environment has clearly changed. Again, both domestically and globally, we have seen central banks and the regulators be a lot more officious in the way that they’re dealing into financial markets. From our perspective, the important element to note there is that they’re ensuring that the markets can remain open and can function in an orderly manner. So the regulatory oversight that we’re seeing has increased and banks are required to hold a lot more capital, as an example, on their balance sheets in order for them to be able to deal into challenging market environments. So that element, we believe is also very different to what we saw back in 2008.
Finally, both the government and central bank response has been a lot more proactive. We saw locally, the federal government here announced a stimulus package yesterday. We’ve seen similar packages being set up in other parts of the world. So from that perspective, we believe governments have certainly been more proactive. Even though economic activity is clearly going to slow down quite significantly, we believe, in the first half of this year, governments are ensuring that they at least provide measures into the economy to ensure that is mitigated as much as possible. In our perspective, the sheer set of stimulus coming through is another aspect as to why we think this is different to 2008.
Once we get through the peak cycle of the coronavirus, which continues to be the main driver as to why we’re seeing contraction in both economic activity as well as financial markets, we believe the stimulus packages that are being put in place at this present point in time will ultimately start to be beneficial to not only the real economy but equally translate their way into financial market performance.
So it remains obviously a very fluid situation, but we thought it’d be worthwhile touching base on some of the key reasons why we think today’s environment, albeit very challenging, doesn’t reflect the scenario we saw in 2008, certainly at this point in time as it relates to the real economy and to financial markets in general.
As always, if you have any queries, please reach out to your financial advisor.
Piers Bolger is Chief Investment Officer at Viridian Advisory
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