By GRAHAM FROST 02/01/2009
Last year was a year of records, most of them bad. The failure of the 158 year old Lehman Brothers investment bank in the US during September caused a global panic that brought the financial system close to collapse and called some to question the wisdom of market capitalism.
Wall Street suffered its worst year since 1937 with the S&P 500 falling 38% in local currency terms. The financial sector, now partly state owned, fell 57%. Japan’s Nikkei index lost 42%. European equity indices were down over 40% as well. Overall, the MSCI World index of 23 developed countries lost a record 42% over 2008 as Europe, Japan, and the US entered a synchronised recession.
There were few places to shelter in 2008. Hedge funds, property and corporate bonds generally lost money. Commodities suffered their worst year since recording began of the CRB index in 1956, falling 36%. One exception was gold, which rose 5% over the year in dollars. Platinum, on the other hand, fell 39%.
Investors’ domestic returns were heavily influenced by extreme volatility in foreign exchange markets. Sterling suffered its worst year against the dollar since 1971 and its worst year against the Euro since its introduction in 1999. The pound bought 27% less dollars and 24% less Euros at the end of the year than at the beginning. Against the Yen, the pound fell over 40%!
Governments around the world were forced to intervene to recapitalise the banking system. In the US, the rescue package was heading over US$1trillion by year end. In the UK government deficit spending is set to rise to an unhealthy 8% of GDP. All such spending will be paid for by future tax payers, ensuring lower growth in the long term in order to avoid a Depression in the short term. The deficiencies of risk management in the financial system will doubtless be addressed by a plethora of regulations and more active economic management in the years ahead.
Interest rates have already hit the lows of the last 50 years. By December, rates were down to a target range of 0-0.25% in the US and 2% in the UK, the lowest since 1951. There may be more to come as this recession is likely to prove worse than most.
Other highlights of 2008 were, the election of Barack Obama as the first black president of the US, and the impressive Beijing Olympics of the summer. Unfortunately, the year was marred by the outbreak of hostilities between Russia and Georgia, the Mumbai massacre, and the Israeli-Palestinian conflict. Let us hope 2009 brings more stability to both countries and capital markets.
A Happy and Prosperous New Year to all our clients and their families.
Last word goes to legendary investor Warren Buffet whose Berkshire Hathaway stock lost 32% during the year: ‘It’s happened to me three other times. It happened in 1974 and 1987. In 1998-2000 it went down 50%. I mean, I hope I live long enough so it happens a couple more times.’