Macroeconomic Views

Amundi Cross Asset Investment Strategy - September 2018

United Kingdom, September 13, 2018 by Amundi

10 years from Lehman: reality check

The collapse of Lehman Brothers 10 years ago marked the beginning of the 2008 financial crisis. The legacy of the crisis reveals to us a series of paradoxes, with consequences for both the economy and financial markets.

1. The missed deleveraging: If the pace of debt accumulation has slowed down, deleveraging in absolute terms has hardly happened at all post crisis. The prospect of higher rates and the exhaustion of the cyclical upswing open up questions about debt sustainability. Assessing areas of vulnerabilities that could translate into idiosyncratic risks will be key to preventing capital impairment.

2. The two sides of liquidity: Despite the macro excess of liquidity in the balance sheets of Central Banks (CB), we are facing a micro deterioration of market liquidity due to post-crisis regulations. The challenge for asset managers is to implement strategies to deal with this liquidity paradox.

3. A medicine with uncertain collateral effects: The response to the crisis was a massive (cyclical) stimulation of growth, mainly through monetary policy, then followed by the fiscal arm – even in the Eurozone. But the nature of the crisis and its genesis in the credit cycle significantly prolonged the healing process. New imbalances emerged in the form of asset price inflation. Unless some form of productivity shock materialises, in the long term markets will tend to readjust to their fundamentals (for example, equity markets to return to earnings growth) and lower returns.

4. Inequalities and instability have increased, not decreased: With the recovery involving the financial sphere rather than the real world (asset inflation replacing goods and wage inflation), and the widening of inequalities, the support for populist parties rose in many countries. In addition, the increased importance of China as a global political and economic player has added further complexity to the whole picture. Protectionism is another consequence of the more inward-looking political attitude. The globalisation theme has not run its course, but investors must assess powerful shifts in the structure of global growth towards more “domestic” engines via active global approaches.

With a short-term perspective, the economic slowdown we see ahead is likely to reveal sets of risks well beyond the classic ones (stronger growth leading to higher inflation and higher rates), such as cracks in the most imbalanced situations, political risk  tariffs/uncertainties regarding US policy action) on the macro side, and liquidity and positioning on the market side. Risk-off sentiment may emerge, triggered by idiosyncratic situations (Turkey and Italy as the most recent examples) reviving the appeal of the “Western core”. Core assets and core rates should receive some support; in equity we should expect to see a rotation of styles versus quality and value. Peripheral bonds and emerging markets could suffer in the short term, however, as the threat of much higher rates and a much stronger dollar are largely behind us, this general repricing should be seen as an entry point (excluding idiosyncratic situations) for long-term investors.