by Gabriel Lacroix | Thursday, 17 September 2009
A year after US investment bank Lehman Brothers failed and set off the rollercoaster ride that became the Global Financial Crisis, the world has pulled back from the brink – but there are at least eight lessons investors must learn from it, according to AMP Capital Investors’ Head of Investment Strategy & Chief Economist Dr Shane Oliver.
Oliver believes the signs of improvements are virtually everywhere. “Firstly, money markets are almost back to normal and credit markets have improved dramatically. Secondly, economic indicators in most countries seem to be rebounding almost as quickly as they collapsed,” Oliver said. “This is illustrated in the OECD’s leading economic indicators, which are combinations of indicators such as consumer confidence and building approvals, which lead future activity.”
In his view, there are several lessons to be learned from the GFC. “First, the GFC has provided a reminder that the capitalist system is inherently unstable thanks in large part to human psychology, and that the idea of an efficient market that can never go astray is completely fallacious.
“Second, there is a role for government to stabilise the economic cycle. Most importantly, policy makers have a decent, albeit not perfect, set of tools in their tool kit to do this.”
The third lesson – these things happen. “While after each economic crisis there is a desire to make sure it never happens again, history tell us that manias, panics and crashes are part and parcel of the process of ‘creative destruction’ that has led to exponential increase in material prosperity in capitalist countries,” Oliver argues.
And, he says, the basic lessons remain the same: higher returns come with higher risk; the role of sentiment can’t be ignored; be wary of financial engineering and products that are hard to understand; be wary of having too much debt; don’t think that having a well diversified portfolio of growth assets will necessarily protect you in a financial panic.
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