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The Dissolving Divides that Will Shape the Post-Crisis Investment Era

2008 2018 2028
Overview

Overview

As the summer of 2018 draws to a close, our minds turn back to the financial crisis of a decade ago. Those events were so momentous in their impact on the global financial markets, economy and society that we still feel the aftershocks today. Investors and policymakers are still grappling with the effects of the crisis and the unprecedented response.

That is why we used this anniversary as an opportunity to engage with colleagues from across Neuberger Berman, not just to reflect upon the crisis and its aftermath, but more importantly to draw upon the countless conversations we have had with clients and company management teams from around the world to look to the future.

A Look Back

The 2008 – 09 crisis shocked stock markets, but its impact on debt markets was unprecedented. The 55% plunge in world equity markets was extremely painful, but within historical experience. By contrast, the catastrophe in credit markets—beginning in U.S. subprime mortgages, sending high-yield credit spreads above 2,000 basis points, and culminating in a European sovereign defaulting on an IMF payment—was an unparalleled and scarring experience

Policymakers’ responses to the crisis were equally unprecedented. Major central banks adopted vast quantitative easing programs and, in some cases, negative interest rates. Regulatory authorities overhauled swaths of banking and market regulation. Government balance sheets groaned under the weight of trillions of dollars of debt taken on from the imperiled private sector. Some, such as the U.S. and China, added substantial fiscal stimulus. Others implemented austerity measures, which in the case of the euro zone revealed structural weaknesses that remain unaddressed.

U.S. GDP contracted by more than 4% in the 12 months to the second quarter of 2009. Even the global economy shrank by 2% that year. Over the next five years unemployment peaked at 10% in the U.S. and 11% in the European Union. Youth unemployment in the EU hit 24%.

Key Events from 2008 to 2018

This unleashed significant social tensions. As the emerging economies opened to trade through the 1980s, '90s and 2000s and became the workshop for the world, cheap goods and cheap credit disguised the fact that the developed world had exported many of its manufacturing jobs. Inequality within countries grew even as global inequality diminished. The financial crisis revealed how unsustainable it was to use consumer credit to paper over the widening cracks.

As if all of this were not enough, the financial crisis and its aftermath coincided with an epochal change in the technological environment, from the arrival of smartphones and social media, to the spread of automation, artificial intelligence and “big data." This unleashed a wave of disruption as nearly every business model in every industry, from retail to media, from transport to finance itself, came under tremendous pressure to reinvent itself or die.

That was then, this is now:
The Four Trends in 22 numbers


Source: International Monetary Fund, Federal Reserve, European Central Bank, Bank of Japan, Standard & Poor's, Federal Reserve Bank of New York, World Bank, Bloomberg, Kleiner Perkins, PitchBook. Data as of 2008 and 2017 unless stated otherwise.

A Look Forward

We imagined ourselves 10 years from now. What are the forces that would still be driving the investment world, and what would have been dismissed as mere noise? We agreed that four big trends will still be shaping the economic and financial landscape.
The explosion of debt throughout the world, taken on by both sovereign and corporate borrowers.
The transition from the east-west world order of the 20th century, and the north-south arrangement of the past 30 years, to the genuinely global, and yet also more fractious multipolar world order of the future.
The restructuring of financial and capital markets, a wave of disintermediation of the banks and public equity and bond markets that dominated the past century.
The growing economic importance of technology.

We argue that all of this has propelled us into a new era in which some longstanding divides are being dissolved: divides between governments and markets, between the emerging world and the developed world, between the public markets and the private markets, between human and machine. Those dynamics lead us to our 10 key investment implications and five guiding principles for investors that we set out at the end of this project.

From these specifics, we believe that there are five guiding principles to take away:

Four Trends, Four Dissolving Divides

Government / Market
Policymakers Try to Cancel Capitalism
If negative rates, quantitative easing and fiscal deficits are now a permanent part of the policy toolbox, what does this mean for the creative destruction of the capital cycle, the sustainability of economic growth and financial risk, return outlooks and risk over the next decade, and the role of active portfolio management? Read More
Emerging World / Developed World
Toward a Multipolar Global Order
What does this mean for emerging markets investing? How will a transition in the global inflation dynamic affect fixed income returns, how we think about "low-risk" assets, and how we go about balancing risk in long-term investment portfolios? Read More
Public Market / Private Market
Capital Raising Goes Back to the Future
 Will private markets become as important, and as liquid, as public markets? What opportunities and risks await investors as banks lose their dominance in lending and market-liquidity provision? Read More
Human / Machine
Creative Destruction at the Speed of Light
How will investors incorporate technology themes into their research, exploit the new ecology of big data, and redefine active portfolio management by marrying the two disciplines of quantitative and fundamental investing? Read More
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