The credit crunch was an extremely difficult period for investors. The FTSE 100 fell by almost 50% from peak to trough and, while it recovered a handful of years later, a number of banks went bust or have not yet returned to their previous highs.
Clearly, the credit crunch was rather unusual. That’s because it came with the possibility of a global financial meltdown, with a number of major banks being too big to fail with regard to their potential impact on the global economy. And, while it kicked-off in 2007, many investors are still haunted by the effect on their portfolio of the worst financial crisis since the Great Depression of the 1930s.
So, the recent fall in the FTSE 100 is rather tame in comparison. It has fallen from a record high of 7100 points in April to just over 6000 points at the time of writing. That’s a fall of over 15% and is insufficient to be labelled a bear market, although further falls in the short run could be on the cards.
The key reasons for the nervousness of investors is a slowdown in China as well as uncertainty surrounding the impact of interest rate rises in the US. The former is not so much a crisis as a disappointment, with the Chinese economy still growing by around 7% per annum and set to become the largest economy on earth within this century. Certainly, that is a lot lower than the double-digit growth of recent years, but perhaps the greatest surprise is that investors believed China would grow at such a rate in perpetuity.
The reality is that China, just like all economies, cannot sustain such a rapid rate of growth as it transitions towards a more consumer-based economy. This will inevitably cause disappointment in the rate of growth in the short run but, in the longer term, it should mean that global demand is more balanced and more stable.
Likewise, the impending rise in interest rates is uncertain, but is a positive step for the global economy. The US dropped interest rates to historic lows to counter a severe recession which is no longer a threat. As such, it makes sense to raise rates at a modest pace so as to prevent high inflation further down the line. Investors may worry that such a move could limit the upside of asset prices, but when it comes to the health of the economy, such a low interest rate does not seem to be required any longer.
So, while it may feel at times as though the global economy is on the brink of collapse given the volatility in the FTSE 100, the reality is that it is far healthier, more resilient and has a brighter future than at any point since prior to the credit crunch. Economic performance will not always be smooth, but buying shares in high quality companies now is likely to be a great move down the line – especially for investors who can tune out of the short term hysteria surrounding the FTSE 100.
