It’s the anniversary that nobody is celebrating. 10 years ago, we plummeted into a recession and it seems like the black hole is set to reopen for a 2019 financial crisis, experts are saying. While Brexit takes centre stage in the UK and resonates throughout the rest of Europe – not to mention the US-China trade war that rages on – why are we just thinking about this impending likelihood now?
Asset managers have been changing their strategies in light of the aforementioned events, as well as evolving their businesses to keep up with regulatory changes. But are we moving forwards or backwards in our approach?
Panic on the Stock Market
Flashback to 2008: the government reacted to the financial crisis by buying ‘toxic assets’ from the affected financial institutions – setting up a ‘Troubled Asset Relief Program’. In addition to this, interest rates were lowered when the Federal Reserve acquired government bonds to boost interests in investment prospects. In total, $10 trillion’s worth of assets were purchased by central banks to reset the balance.
Now, J.P. Morgan have pronounced a fallout forecast, stating that a 2019 financial crisis is likely to result in liquidity disruptions and a decline in assets because of diminutive inflows. And this near-future crisis is only being exacerbated by the US-China trade war. As well as the sudden collapse of the Smart Money Flow Index between 2016 to 2018 – China’s stock prices have taken a dive by 49%. If this pattern continues, the crash is inevitable.
What we should be concerned about are the following:
- Changes to monetary policy will affect the bond market and pose risks throughout the asset classes
- Any failures would mean an increase in tail risks for multi-asset portfolios, as risk models have been structured on bonds that offset equity risk
- Any changes to central bank policies increase the risk to stocks, plus a rise in interest rates could result in stocks falling at an astronomical rate
- The level of global debt could have a detrimental impact on the 2019 financial crisis, as it reached a total of $164 trillion in 2016 (a significant growth of $50 trillion, prior to the 2008 financial crisis)
- Accumulating a high debt is a vulnerable risk for financial institutions, which could lead to higher interest rates – especially if the dollar were to increase too
According to CNN Money, the main sources of a 2019 financial crisis will be related to China’s economy, the result of Brexit, a greater amount of cyberattacks on financial firms (with more Fimtech systems being implemented), and a growing rate of UK household debt. The Bank of England Governor and chair of the Financial Stability Board, Mark Carney, spoke out about how the economical growth in China may look positive, however; the superpower’s projected growth of its financial sector is not guaranteed.