2009 will without a doubt go down in the history of stock markets and economics as a year to remember. For EVP it was the best year in terms of absolute performance since we began managing European equities in 1998.
Though it has hardly been possible for anybody to miss the events unfolding over the last 18 months, we believe it is worthwhile to re-cap some elements of 2009. It is easy to forget the global financial system was only days if not hours from a complete collapse in September 2008. Some people might even think "was this really the biggest crisis since the Great Depression?"
While indeed a certain feeling of stability has returned to the financial markets, many of the problem areas that almost sunk the financial system remain unresolved. Maybe even more worrisome it appears that the will and desire to implement the necessary changes evaporates as time goes on.
Earlier in the year we wrote that the governments and central banks were dealing with the crisis as if it was a liquidity crisis and not the debt crisis it really is. We believe that this incorrect interpretation has supported policies that could have seriously damaging long-term side effects while only partly addressing the underlying causes.
It is fair to state that our central banks saved the world from a serious recession or a possible depression. They unfroze financial markets by injecting massive liquidity into the system. They made extensive use of quantitative easing, namely unorthodox monetary policies like asset purchase programs and emergency funding for banks. Short-term success is undeniable as current interbank rates are as low as pre-crisis, many parts of the credit market have sprung back to life, and junk bonds are thriving.
A main objective from the government and central banks has been to get credit flowing again. But solving a credit crisis with more debt seems folly. The consumer has learned the lesson. Savings rates have gone up while depressing demand. Governments on the other hand have increased debt to levels only previously seen during wartime. Central banks have expanded their balance sheets to levels unheard of. Needless to say, the 3% deficit rule applying to the Euro countries has practically been suspended. Officially countries have to get back below the 3% limit before 2013. The financial markets will not accept a permanent suspension.
The main beneficiaries of the policy actions have been, and were supposed to be, the banks. In particular those that have international capital market operations have been the main beneficiaries. Many of these banks show record profits, which, with some reason, have infuriated both governments and the public. The big profits have come from investment banking and not from regular banking activities. Lending has not recovered yet. |
