What has improved 10 years after Lehman: DBS

What has improved 10 years after Lehman: DBS

PC Lee
04/09/18, 01:00 pm

SINGAPORE (Sept 4): This year marks the 10th anniversary of the Global Financial Crisis or Lehman Crisis that sent shock waves through the global financial system.

On Sept 2008, financial services firm Lehman Brothers filed for bankruptcy which eventually prompted massive capital-raising exercises to keep a number of key financial institutions afloat.

After relentless efforts to supply liquidity, the US’s quantitative easing (QE) finally came to an end in Sept 2017. However, the removal of QE and the normalisation of US interest rate policy resulted in US-dollar strength. It also induced stress in some corners of financial markets, particularly in the Emerging Markets (EM) of Argentina and Turkey.

Similarly, the European Central Bank’s (ECB) plan to exit the bond purchase programmes by the end of this year and potentially similar steps by the Bank of Japan (BOJ) to normalise liquidity supports may lead to pressure in ways that investors may not fully appreciate, says DBS Bank in a Tuesday report. This may include further weakness in European economies like Italy and other peripheral countries.

At this juncture, DBS does not foresee any strong sign of risks similar to that of Lehman’s collapse though. However, despite the key improvements from 2008, investors must be cognisant of potential crises – for example the escalation of current trade tensions into a full-blown trade war, says DBS Chief Investment Officer Hou Wey Fook Bank in the report.

Nevertheless, compared with the dawn of the Lehman crisis, Asian economies have now accumulated larger reserves, says Hou. In addition, despite a series of fiscal stimulus and monetary easing over the past 10 years, government finances have stayed manageable, with government debts kept at below 50% of GDP value. All these point to a firmer footing, to help buffer against any potential impact from capital outflows.

So what has improved over the past 10 years? Compared to 2008, banks are better capitalised, households are less leveraged and financial products are better regulated, says Hou. The balance sheets of corporates and banks have also improved substantially, with higher capital and liquid assets in hand. Notably, the financial regulatory framework has also been tightened by regulators.

According to DBS, some of the improvements worth highlighting include:

  • The absence of structural imbalances. Financial imbalances have shifted from private households to the public sector. This reduces the probability of a panic de-risking of portfolios, in the event of macro uncertainty.
  • Credit spreads remain tight. In previous crises and equity selldowns, including the global financial crisis (GFC) of 2008, credit yield spreads widened sharply. In contrast, yield spreads have stayed tight at present, as the risk of recessions and defaults remain low..
  • The US economy remains healthy, as seen from its low unemployment rate. This has fallen to 3.9% in 2Q18 – a level even below the end-2006 low of 4.4%. In addition, gross domestic product (GDP) per capita is at an all-time high.
  • Asian foreign exchange (FX) reserves are stronger and government debts are manageable.

Compared to the period before the GFC, Asian economies have now accumulated larger reserves. Despite a series of fiscal stimulus and monetary easing over the past 10 years, government finances have also stayed manageable, with national debts kept at below 50% of GDP value. All these point to a firmer footing, to help buffer against any potential impact from capital outflows, according to DBS.

What then should investors do?

“It is important to construct portfolios that are positioned for the long term, with a clear risk-return objective in mind,” says Hou, “This would mean having a diversified portfolio comprising bonds, equities, cash, and gold, spread globally and across sectors.”

Such a portfolio will be able to withstand big swings in the market when crises unfold. It would help investors to stay focused and avoid any overreactions.

In fact, with instruments like cash and government bonds, the investor can capitalise on opportunities in periods of heightened volatility and when markets turn “irrational”.

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