It’s now 10 years since markets started to wobble, then shake, before toppling calamitously as the global financial system almost collapsed.
A decade on however, while some markets have stalled, others have roared ahead, reaching new highs and promising even more. So which ones are the winners, which are the losers, what’s going to happen next, and where does the Irish market stand in all of this?
The winners
Yes, it may be top of the list, but few people will be rushing perhaps to invest in Venezuela’s stock market, even as it soars exponentially. But that’s a sign more of the country’s economic duress than its prowess. Amid hyperinflation and a collapsing bolivar, the country’s stock market appears to be prospering.
Elsewhere, however, in general, markets have done what might have been expected of them.
“Markets have been pretty rational in terms of how they’ve behaved over the past 10 years,” says Des Lawrence, senior investment strategist at State Street Global Advisors (SSGA). “The markets that have produced substantial earnings growth are the ones where share prices have risen the most”.
“Companies have managed to earn a lot more, and we see that trend in the US, in Japan, and in Germany,” he adds.
Bernard Swords, chief investment officer with Goodbody Stockbrokers, agrees, noting that in the US EPS (earnings per share) are above where they were at peak of last boom. But if you look to Europe, “they’re still about 30 per cent below where they were”.
Indeed, the Dow Jones has soared by more than 60 per cent since 2007; other US markets have gone even higher. The S&P 500 has nearly quadrupled in value since 2009 for example, and it is up by about 15 per cent so far this year. October was the 12th straight month the index was in the black.
According to the New York Times, this is the first time this has happened since 1935.
On the UK front, the drop in sterling turned out to be quite favourable for companies in the FTSE 100 and helped propel it higher, where it now stands above where it was back in 2007.
The losers
So if earnings are driving the gains in many markets, it stands to reason then that the opposite is true in markets which have yet to recover their 2007 highs.
“Ireland, Greece... those are countries where earnings are hugely below where they were previously on aggregate,” says Lawrence, adding that Ireland remains “hugely behind” markets like the US and Japan.
Another key distinguishing factor in the markets that have performed – and those which haven’t – is how significant the banking sector was back in 2007.
“Ireland has underperformed because banks made up a huge percentage [of the Iseq]; AIB basically went bankrupt so you lost a huge chunk of your index,” says Swords.
However, despite the change in concentration, risk remains a factor. Back in 2007, four financial institutions accounted for more than 40 per cent of the capitalisation of the Iseq; fast forward to today and three stocks (CRH, Ryanair and Kerry Group) account for more than half of it.
So while, from a sector specific basis, it’s less concentrated, it’s still focused on less than a handful of names.
“Three stocks tend to dominate most of the moves, that’s something investors need to be mindful of,” cautions Lawrence.
What might surprise perhaps, is that concentration risk may not just be limited to smaller markets like the Iseq. As Lawrence notes, tech stocks now account for about 25 per cent of the S&P though he says this shouldn’t be of undue concern to people with 2000 still fresh in their minds.
“It’s a very different environment to the tech bubble which wasn’t necessarily about fundamental earnings; now yes there are actual earnings coming through”.
Where to next?
But while many markets have not just recovered but reached new highs, the question for many people now is where can they go from here?
“The US economy is going into its ninth year of expansion and so people are rightly asking the question,” says Lawrence, adding that, while it’s a “tricky one to answer”, State Street are generally still upbeat about the prospects for equities.
“We’re moderately favourable or optimistic, earnings are still coming through at a good clip,” he says, adding that this is a change from two or three years ago when earnings had started to stall, and the perception was that the US market was expensive.
Indeed the global fund manager is forecasting global equity growth of 6 per cent a year over the next 10 years.
“Right now our risk indicator is telling us it’s a fairly favorable phase we’re in right now,” Lawrence says, adding that the manager remains “over-weight equities underweight government bonds”.
Swords acknowledges that a common question he’s asked is whether or not we’re at the end of a cycle, and whether or not it is still a prudent time to invest.
“But we say cycles never die of old age,” says Swords, adding, “what’s caught people by surprise is the strength of the global economy”.
As such, he expects an “upward march” in markets into 2018.
Another common query is on valuations, and whether they are too high at the moment. While Swords concedes that in absolute terms they are, we are in an era of unusually low bond yields and interest rates.
He also expects the European market, which is more exposed to recovering emerging markets in the Pacific area, to play “catch-up” with US markets.
“More life in Asia will give more of a boost to Europe than the US,” he says, adding that “there is no reason for Europe to continue to lag [the US]”.
This is good news for Irish based investors, given how currency fluctuations have wiped out many of the stock market gains.
“US dollar investors have done very well, but in euro terms it hasn’t been great due to currencies,” says Swords.
Indeed currency risk is likely to remain a problem for Irish investors. As Lawrence notes, a UK investor will have seen gains of 60 per cent on their UK portfolio – a euro based investor will have seen returns of just 29 per cent.
“Currency can do more damage than the market,” he says, adding that there are other risks on the horizon; not enough perhaps to keep him awake at night, but enough for “a little bit of wondering”.
“We are at a mature stage of the cycle, we need to keep a watchful eye on earnings, market volatility is very low,” he says.
Despite the gains many markets have seen, there is still a lot of money waiting on the sidelines. Figures from the Central Bank earlier this month showed that the value of retail deposits has reached a new high, at more than €100 billion.
“After the depth of the recession there is still nervousness,” says Swords.
But would some of this money be better off in the markets?
“Anyone investing in equities needs to take a long-term horizon,” says Lawrence, adds “ if someone has money on deposit account because they have a near term obligation, they obviously have other priorities..but if you don’t need it for 20 years it’s probably a bit unwise”.
