Investors should expect more havoc as history repeats, economists warn

PUBLISHED : Monday, 30 November, 2009, 12:00am
UPDATED : Monday, 30 November, 2009, 12:00am

Economists are urging investors to brush up on their history and take note of the prolonged recessions over the past century, warning them that the current downturn may still wreak further havoc next year.

There had been only two recessions in the 25 years before the current slump, according to a report by Societe Generale, but recessions were typically longer and more frequent before that, with four occurring in the 15 years between 1969 and 1984.

'We tend to anchor what is normal in our own working experience and for most of us the great moderation is normal,' said Albert Edwards, the head of global strategy at SG. 'But recession can follow recovery very quickly, much more quickly than people are thinking.'

Investors panicked last year as bubbles burst in the housing and banking sectors, sending shock waves through financial markets and crippling global trade. It prompted the worst economic downturn since the Depression in the 1930s.

Co-ordinated government stimulus measures have pulled economies back from the brink and financial markets from Hong Kong to Hungary have all zoomed up, turning the page on last year's crash.

'The authorities have undoubtedly stabilised things and we are undoubtedly getting a cyclical recovery,' Edwards said. 'It's basically a one-off boost for a heroin addict though, and as soon as it peters out you go back cold turkey and then you have to have another shot.'

The mainland's economy has started to hit its stride, expanding 8.9 per cent in the third quarter after three periods below 8 per cent. Retail sales have increased in four consecutive months and industrial production last month was the highest since March last year.

'Asian consumption is much stronger than a lot of people realise,' said Craig Irvine, a co-head of regional research Asia (excluding Japan) at Daiwa Securities SMBC. 'The outlook for [much] of Asia is simply not dependent on the West anymore.'

Asian economies could soon revisit previous growth trend rates while the West remained stagnant over the next few years, Irvine said. And values of regional currencies, properties, and stocks should all rise as a result.

'We're back to normal markets where we can find a lot of opportunity set against the backdrop of a very, very strong longer-term outlook for the region,' he said. 'We're well short of having reason to be particularly concerned about a bubble.'

Finance ministers at the Asia-Pacific Economic Co-operation summit earlier this month said the global economy was improving but problems persisted. They pledged to keep the fiscal and monetary taps flowing to boost recovery efforts.

Loose monetary policy in the previous decade is now considered one of the key causes of the bubbles that set off the financial crisis last year, however.

'We always get told after coming out with a bear story that it's different this time,' Edwards said. 'And so you have got to be cynical and sceptical because the problem with growth-themed investing is people become evangelists and believers in it.'

The growth surge across the border has drawn some comparisons to the sharp rebound in Japan at the end of the 1980s. That run-up was followed by a so-called 'lost decade', in which the economy languished after financial bubbles popped.

But historical analogies could overlook important contextual differences between the items being compared and should be taken with a grain of salt, said Burkhard Varnholt, the chief investment officer at Bank Sarasin. 'History is relevant and it's not relevant,' he said. 'It would be sad not to use historical data, but it can also be misleading to put too much interpretation into it.'

The financial crisis over the past 18 months had struck a similar path to the previous big market crashes in the past century, he said. And while the recovery might not follow the same track as prior ones, history at least provided investors with a bearing while they weathered the storm.

'It always feels unprecedented like a once-in-a-lifetime crisis,' Varnholt said. 'And yet, if you look at history, it has all been there before.'

Words of wisdom

Experts say recession can follow recovery faster than people think

The number of times recessions occurred between 1969 and 1984: 4