Credit crunch: Manager views three years on

On the third anniversary of the beginning of the credit crunch, fund managers warn the global economy is far from stable and still faces a decade of sub-par growth.

August 2007 is widely regarded as the start of the credit crunch, following BNP Paribas’ suspension of pricing of two money market funds over illiquidity in structured credit markets.

What followed over the next three years was one of the worst global recessions experienced since the Great Depression and a near meltdown of the financial system.

Looking back over the past 50 years, M&G’s Richard Woolnough says despite the obvious cyclical upturns and downturns, the global economy has largely experienced a period of strongly upward trending growth.

However, following the credit crunch, Woolnough now questions whether the perceived ‘normal’ is still relevant.

“It has been the job of the modern fund manager, from a stock selection point of view, to identify if individual stocks and sectors are in a long-term trend or mean reverting mode. While from the macro point of view, they have just had to focus on where the economic cycle is within its permanent uptrend,” Woolnough says

“The challenge investors now face is to add another dimension to this traditional thinking. What if economic growth is no longer permanently upward trending? What if the trend of growing economies in the developed world is coming to an end?”

With interest rates in the US at near zero and quantitative easing still being employed, Woolnough says the Federal Reserve and other G7 economies have almost used up all the weapons in their armouries.

“Despite all of these extraordinary measures, the global economic recovery remains in doubt. The central banks around the world are currently running ultra-easy monetary policy and will continue to do so for some time,” he says.

“The question now is whether we are experiencing a long-term structural change in economic growth prospects. Maybe we are no longer just in a cyclical downturn. It has been three years since the credit crunch began, and the arguments this is not a normal economic cycle are becoming more compelling.

“If this is the case, it will be a long term growth environment that Western governments, central bankers, and fund managers have never seen before in their working lives.”

Schroders CIO Alan Brown says the global economy still faces “colossal headwinds” and investors should not expect to see the unrealistic growth rates of the past 20 years.

“After seven years of plenty, we now face seven years of lean,” Brown says.

“Authorities have no policy levers left; this is why the markets are currently so nervous. There is the balance between those who believe in the ‘double dip death spiral’ and those who believe in the prolonged period of low growth’. Luckily, I believe we will see the latter.”

Ignis chief market economist Stuart Thomson also paints a bleak picture for the future.

“History suggests economies experience slow and volatile recoveries in the wake of banking panics. Many years of both public and private sector deleveraging are required to restore financial stability,” he says.

“It would take nearly two decades of grind if annual quarterly nominal GDP growth maintains the 0.9% average that prevailed between the second quarter of 2007 and the first quarter of 2010.”