If my memory serves me well, what I remember from 2008 seems to be coming back. Clear in my mind is the commodity bull market that peaked that year. Bhp Billiton and Rio Tinto were all the rage among investors as they competed for every mine on earth as if metal supply were about to end.
In the meantime, financial institutions were splurging accumulated reserves into acquisitions; racing for the title of world’s largest bank. In this environment Investment Bankers were at the pinnacle of the financial world. Working for one of these firms was the dream of every finance professional.
Cracks appeared in February of that year as a sell-off in Asia rippled throughout the rest of the world. At the time analysts said that it was just a much needed healthy correction. But soon the US sub-prime crisis reared its head bringing down Bear Stearns among others.
What strikes me most is that, at the time, the exact words used to describe China’s slow path to normal growth was ‘soft landing’. This term is once more fashionable. The crisis slowly accelerated towards the Lehman collapse and subsequent financial crisis that have characterized financial markets since.
What I tend to note is that the main actors in the play are more or less the same. We have declining commodity prices, fiscally constrained governments, doubts on the financial sector and talk about a recession.
What must not be ignored is that this is all part of the economic cycle. The economic cycle had reached its peak in 2008, and no amount of wishful thinking or financial engineering would have changed its general direction.
The path that economies have taken in the past few years would have probably been clearer if the environment was more normal. However, desperate acts by central banks and governments have distorted the eventual outcome.
Economies are now turning towards the next trough, probably the next recession. This brings with it pressures on commodities, pressures on government finances and doubts on the financial sector. Most governments are unprepared since their eyesight rarely sees beyond the next election. Most have also failed miserably to restructure.
The turnaround will take time as first the market will have its losers. The losers may be countries, firms, whole sector or individual investors. But it is a certainty that there will be losers as much as there will be winners. Another certainty is that markets will come back, usually stronger. But first the weak have to be chafed out.
In this scenario sticking to large healthy firms is the best option. Selling good names at current prices is like giving away your valuables. However, it is the time to get rid of that asset which only water from Lourdes would revive.
The small investors’ worst enemy at this stage is panic. There is a possibility that markets will get worse before they get better. However, this is the time when professionals and amateurs are sorted, when wealth changes hands at ridiculous prices and when experienced investors prepare portfolios that will eventually make money.
Disclaimer: This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.