Investment returns through the financial crisis | Deloitte UK has been saved
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Last week we held a lunch at our London offices to mark the eighth anniversary of Deloitte's UK CFO Survey. The Bank of England's Chief Economist, Andy Haldane, gave the guest address.
The CFO Survey started in the third quarter of 2007. That quarter also saw a run on the UK building society Northern Rock and UBS declare $3.4 billion of losses on US sub-prime mortgages. As such, the third quarter of 2007 has a good claim to mark the beginning of the global financial crisis.
In his remarks Andy highlighted how different the world was then. The UK FTSE100 equity index stood at 6700 and UK base rates were 5.75%. Today, eight and a half years later, the FTSE100 is 6,200, or 7% lower, and interest rates are 0.5%. Andy showed us a remarkable chart using data he had put together from various sources plotting interest rates since 3000BC. The chart demonstrated that rates in the UK and the rest of the rich world are the lowest in the last 5000 years.
This prompted me to think about how savers and investors have fared over a rather shorter time period, since the onset of the financial crisis. Returns on bank deposits have, of course, collapsed in a low interest rate environment. In the last eight and a half years someone with an ordinary UK bank or building society instant access account would have been lucky to make 8% on their savings.
But how have other assets done?
Gold has been the star performer, benefiting from a rush of investors seeking a safe haven in the wake of the financial crisis. Although gold prices have fallen since 2013 the price is still 87% higher than in July 2007. This beats the performance of major developed world stock markets and bonds.
Lending money to the government has also been a good investment. Investors have flocked to buy the bonds of the big, solvent industrialised nations as a shelter from risk and uncertainty. Meanwhile central banks have being buying up government bonds through their programmes of Quantitative Easing, or money printing.
Government bonds have given savers strong returns, with UK bonds yielding 82% since the third quarter of 2007, euro area bonds 67% and US bonds 50%.
European equities have delivered much lower returns. Putting money in a basket of euro area equities would have lost you 15% over this period. Investors' gains on German, French and Dutch equities would have been more than offset by losses on the Italian, Spanish, Portuguese, Irish and Greek markets.
Greek equities have been Europe's worst performers, falling 94%. The value of financials, including banks, has been almost wiped out. A €100 investment in Greek financial shares in July 2007 would be worth just 11 cents today.
UK equities have been the best performers in Europe, yielding a respectable 32% return.
The US has seen a stronger economic recovery than the UK or the euro area and equities have outperformed too, returning 64%. Much of the return on US equities has come in the form of dividend income as businesses have returned cash to shareholders.
Across advanced economies technology has been one of the best performing equity sectors, thanks in part to continued growth in demand for tech products and services. Technology shares have returned 240% in the UK and 101% in the US.
Pharmaceuticals and biotech shares have also outperformed wider markets as investors have placed bets on new innovations in the sector. Shares in retail and consumer goods companies have benefited from the efforts of central banks to kick start consumer spending.
And the big losers? The financial crisis and its aftermath have been a torrid time for financial shares which have fallen sharply in most advanced economies. Oil, gas and mining shares did well when commodity prices were high, but losses since then have left these sectors among the worst performers of the last eight and a half years.
Emerging market shares were initially seen as a safe haven from what looked like a Western financial crisis. But over the period since the financial crisis returns have been poor. Chinese equities have returned just 7%, Brazilian equities 9%. Investing in the Russian equity market would have lost you 11%. India is the star and its equity market has delivered a 78% return in local currency since the third quarter of 2007.
In the UK, at least, consumers still seem to see housing as a good investment. Despite falls in house prices in 2009, housing seems, on our calculations, to have been a good place to put your money through the financial crisis. Since July 2008 the price of an average house in the UK has risen from £218,000 to £292,000, an increase of 34%. Add in the fact that you can either live in the house or rent it out and the true gains are higher. The average rental income over this period has been £71,894, a return of 33%. On our numbers UK housing has delivered a total return of roughly 67% since the start of the financial crisis. Unlike the returns from most other assets, UK owner occupiers pay no tax on the gains from their principal private residence, making the gains on housing even more attractive.
At this point it is as well to recall, as the financial advertisements put it, that past performance is no guide to future performance. Just because something has done well in the recent past is no reason to think it will continue to do so. The performance of different assets since the financial crisis does, however, reinforce some enduring truths about investing.
First, as Warren Buffett points out, dividends matter. Returns on equities are a function of changes in the value of a stock and of the dividends they pay. The level of the equity market attracts significant media interest, dividends far less. But in recent years the returns from equities in many markets has come almost entirely in the form of dividends. Hoping for rising UK share prices to make you money in the last eight and half years would have left you nursing a loss of 3%. The 32% return on UK equities has come entirely from growth in dividends.
Second, in a globalised world national equity markets only partially reflect national economies. The stellar 280% return on Spanish retail shares since 2007 looks puzzling given that Spain's economy was in recession for five of these years. A key factor was Spanish retailer Inditex, owner of clothing brand Zara, which derives 80% of its sales from outside Spain.
Third, currency movements can dwarf the effects of changes in the value of underlying investments. The dollar has appreciated by some 20% on trade-weighted basis since 2008, and far more against emerging market currencies. For a dollar investor local returns of around 150% on South African equities would have been largely wiped out by the sharp fall in the South African rand against the dollar.
For most people, especially the young, their main asset is not financial, it is the value of their labour, current and future. The financial crisis and the ensuing slowdown in growth has put significant pressure on wages. US wages have risen by 21% since 2008, UK wages by 16%, both well below the return on equities or bonds - though better than the return on cash.
Investors may not be delighted with the returns they have made since the start of the financial crisis. But times have been tougher for those whose only asset is their labour.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.