London is unique, not least because it’s the only city to have hosted the Olympics three times (the other two were in 1908 and 1948). Such is the global acclaim for the success of the 2012 games that perhaps we should put in a late bid for 2020! Madrid seems to be the front-runner for that – the decision will be made in September next year. But will Spain have gone bankrupt by then?
Last week, while the British were beguiled by the performance of our athletes, we marked a little-reported anniversary. The credit crunch – which eventually triggered Madrid’s plunge into economic crisis, not to mention the UK, the US, the eurozone and most of the rest of the world – began 5 years ago last week, when BNP Paribas froze three money market funds. And here we all are, still mired in crisis, especially in the eurozone; still with our own economy flat-lining; still with years of austerity lying ahead of us.
So this is a good time to take stock. How well, and how badly did investors fare over that 5-year period?
Some investors will have been shrewd enough to have had an excellent crisis. In times of danger, investors try to find a safe haven for their cash. Safe haven investments have done spectacularly well.
Step onto the podium those among you who, like our Olympic athletes, went for gold five years ago. Your investment would have appreciated by 140%. So much for Warren Buffett’s scathing comments about gold: “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” In our not-so-humble opinion, the rise and rise of gold is not especially puzzling, given the scramble by so many countries to debase their own currencies.
Swiss, US, German and UK government bonds were the next best places to be. An investment in 10-year US Treasury bonds would have returned a handsome 59% over 5 years. US corporate junk (high yield) bonds did almost as well.
How about commodities? If you’d gone for an investment tracking the S&P GSCI, the most widely followed commodities index, you would in theory have seen a 34.8% gain since August 2007. But nothing is simple in the investment world. In practice, you would have lost 19.3% because of the futures markets roll-over costs. But then again, if you’d been out of commodities until very recently, and then invested in corn or soyabeans, you would have made a small fortune off the back of other people’s misery, thanks to the great American drought.
What about shares? Well, it has been an extremely bumpy ride, but shares haven’t done as badly as you might expect – partly because, for several months, UK equity investors were in state of denial that they were entering the biggest economic disaster since the Second World War. Between August 2007 and October 2007, London-listed shares continued to rise even during the run on Northern Rock. The Footsie is 13% down since August 2007. The S&P 500 did much better, up 8% – better even than emerging markets. But not surprisingly, eurozone shares have performed abysmally, down 35% in dollar terms.
Meanwhile, the situation in the eurozone is steadily deteriorating.
Let’s start with the eurozone’s fourth biggest economy, Spain. In a recent Reuters poll of economists, 35 out of 59 economists thought it was ‘likely’ or ‘very likely’ that Spain would require a full-on bail-out by the end of the year.
The third biggest eurozone economy is Italy, now deep in recession and steadily deteriorating. It suffered a 0.7% fall in GDP in the last quarter, putting it on course for a 2.5% decline over the full year.
The second biggest economy is France. It too is on the slide. It posted zero growth in the first two quarters of the year. The French central bank estimates that output will fall by 0.1% next quarter, very likely putting the country officially into recession by Q4.
And we haven’t even mentioned the tiddlers such as Ireland, Greece (shrinking at an annualised rate of 6.2%) and Portugal (shrinking by 3.3%), whose economies are in deepest doo-doo.
Even Germany, the powerhouse of the eurozone, suffered a 7.8% drop in orders in the last quarter compared to a year ago. How could it be otherwise, when so many of its trading partners (including the UK) are sliding underwater.
So one by one, the dominoes are wobbling more precariously, as economic decline in one country drags down another. How many will still be standing when the Olympic flame reaches Rio?
A guest blog by Trendwatch.