A number of wealth managers and economists comment on the momentous events of 10 years ago, and reflect on how - or not - the global economy has changed.

Tomorrow – 15 September – is the 10th anniversary of the bankruptcy of Lehman Brothers and the period of high drama in the globe’s financial markets. The biggest financial drama since the early 1930s leaves its impact – the political, social, cultural and economic effects of what happened are stil being felt. The wealth management industry, as this publication recently stated, is still wrestling with the effects of that crisis. (See this publication's editorial commentary here.)

The editorial team at this publication have gathered thoughts from a range of wealth management firms around the world about the events of 10 years ago. 

Brad Tank, chief investment officer and global head of fixed income at Neuberger Berman
In the aftermath of the financial crisis, bond markets were too big. They became substantially smaller by virtue of central bank intervention, but now we need to recognise they are about to become too big again and credit quality has deteriorated in the meantime.

Over the past 20 years, the average credit rating has fallen from A to BBB, as more and more companies have succumbed to the attractions of cheap debt. We expect the credit cycle to turn at some point over the next two to three years. When that happens, a considerable ‘threshold risk’ could be realised, as a substantial proportion of the bloated BBB-rated market is downgraded from investment grade to high yield.

The financial crisis was above all a credit event and a good reminder that fixed income and credit can be subject to major loss events and long periods of poor real-terms performance. In fact, three decades of declining interest rates may have allowed investors to forget that, before the 1980s, the number of long-term periods of poor total returns for bonds is far greater than for equities.

Kevin Gardiner, global investment strategist, Rothschild Wealth Management
My personal take on the Global Financial Crisis perhaps differs from the conventional one. Shocking and shameful as the GFC was, I did not see it as a watershed for the global economy or capitalism. If the financial plumbing was fixed, there was no reason why the world – though not the financial sector itself – couldn’t move back towards business as usual. With the conspicuous exceptions of European and Japanese monetary policy, it largely has.

The economic climate remains relatively benign: a mix of ongoing growth with mostly subdued inflation, which is delivering healthy profitability alongside only modest interest rate risk (even in the fully employed US). Stocks have travelled a long way, but strong profits growth means that the US market’s forward price–earnings (p/e) ratio is little different to what it was three years ago. A full-blown trade war can still be avoided, and the sell-off in EMs [emerging markets] looks containable to us. The strong US growth that is helping normalise US interest rates and supporting the dollar should also boost many emerging economy exports – higher tariffs notwithstanding.

Those wider geopolitical concerns may also be more manageable than feared. Fashionable talk of democracy’s demise seems premature. Overall, then, historical echoes and more contemporary risks aside, we still see growth-related assets as the most likely source of long-term inflation beating returns.

Laith Khalaf, senior analyst, Hargreaves Lansdown
The collapse of Lehman Brothers was a pivotal moment in the financial crisis, which unleashed a wave of chaos across global markets, and ultimately led to a decade of exceptionally loose monetary policy. In the UK, it was also the catalyst for the government bailout of RBS and Lloyds, after the latter was persuaded to rescue HBOS just days after Lehman filed for bankruptcy.

The scars of the financial crisis can be observed today in the abysmal rates still available on cash savings, and in the negative sentiment towards today’s buoyant stock market, as investors are once bitten, twice shy. For those who continually live in fear of a market crash, it’s worth noting that an investment made in the UK stock market on the eve of Lehman’s bankruptcy would still have more than doubled in value by now. While there is concern over current stock market valuations, particularly in the US, the truth is no-one knows how long this bull market will last, or when the next correction will be. The best way for investors to deal with this uncertainty is to simply drip feed money into the market through a monthly savings plan, thereby taking advantage of any dips and enjoying a smoother ride.

Jens Hagendoff, Professor of Finance at the University of Edinburgh Business School
The Lehman bankruptcy almost sent the global financial system into meltdown and ten years on, it remains vulnerable. Increasing bond spreads in Italy, jitters in emerging markets, and the low market valuations of European banks show today’s investors are nervous. Equity capital is the most effective absorber of bank losses. Since the Lehman collapse and the crisis that followed, many banks have increased their equity capital. However, the discussion far too often focuses on increases in capital. The problem with this is that even sizable increases in equity are not sufficient if the level of equity pre-crisis was painfully low.

Today, the level of equity held by many of Europe’s largest banks remains low. The spark for the next Lehman style crisis is likely to come from Europe. In Italy in particular, the doom loop between banks and their government continues. Italian banks are major buyers of Italian government bonds. Even a small haircut on those bonds (not an improbable scenario given recent spikes in spreads or the increasing price of insurance against such an event) would cause Italian banks such as Unicredit to become insolvent. What would follow will enter the history books like the Lehman bankruptcy.

The goal is not to design a banking system in which banks do not fail - that would never be possible. Banks have failed since the time of the Medicis in Renaissance Florence. The goal is to design a financial system in which banks may fail without endangering the stability of the global financial system. The Lehman bankruptcy has taught us how not to fail a bank. Global regulators are still working on the rest.

Vince Childers, manager of the Cohen & Steers Diversified Real Assets Fund
The mindset of most investors remains framed by the financial crisis and the disinflationary period that followed. However, we believe it is important investors do not dismiss the lessons of pre-crisis history and accept the possibility markets can display different dynamics in the future.

One such environment, which we have seen in the past, is a period where inflation surprisingly accelerates to the upside. In this scenario, stocks and bonds typically struggle simultaneously and do not provide any portfolio diversification benefits. In a period of inflation surprise, an allocation to real assets tends to perform well and provide much-needed diversification.

Many investors are currently complacent in relation to inflation risks. Combine this with historically-elevated equity valuations and still-low bond yields and we could be witnessing potentially lethal portfolio positioning. While many forward-looking institutional investors are continuing to increase allocations to real assets, many individuals remain content riding the stock juggernaut.

While real assets tend to perform well when risks are inflationary, this area of the market also currently offers considerable value – as real assets only partially participated in the risk-on rally experienced since 2008.

Keith Wade, Schroders chief economist      
Ten years on from the collapse of Lehman Brothers and the deepening of the global financial crisis, the world seems to be a safer place. Over the past decade there have been significant shifts in the world economy such that the imbalances that could lead to a crisis are less. The risks haven’t entirely gone away, but they have shifted and are different to those of a decade ago.

The global financial crisis had its origins in a savings glut that built up as emerging markets, notably China, developed an excess of saving over investment. Much of the excess capital ended up in the banking systems of the developed markets, particularly the US and UK, where it was fed into the economy at ever-easier terms, with an explosion in sub-prime mortgage lending.

However, as the chart above shows, the surplus in the emerging world has disappeared while developed countries have moved from deficit to surplus. On the developed economy side, the swing into surplus was primarily driven by the eurozone, but the US also contributed to the turnaround with a sharp reduction in its deficit.

Meanwhile, on the emerging market side, the move from surplus to deficit has been driven by China and the oil producers. The fall in the Middle East surplus largely reflects the decline in oil prices. For China, the overall current account surplus has fallen as a growing deficit in services, [which] now offsets a significant part of the surplus on goods. This services deficit is largely due to the huge increase in Chinese outbound tourism.