10 Years After The Start of Financial Crisis, Where Are We?

Early 2007. HSBC had to concede it had deep financial troubles related to the US real estate market. The word « subprime » was starting to spread. Key players in the US real estate market, such as New Century, were also getting destroyed by the same rising tide. It was the start of the most important financial crisis in history since 1929.

Forward 10 years. On the macro front, we’ve had one of the most sluggish recovery due to the loss in real income and destruction of productive capacities related to the crisis and the impaired distribution of credit by the financial system and tougher regulation (Wells Fargo released research on the matter recently).

Recovery has been sluggish, yet financial markets have performed relatively well over the last 10 years.

There are still questions to be resolved (presently the political uncertainty + the ability for economic recovery to accelerate properly without damaging asset prices)…

Deutsche Bank’s House Views give a sum up of what’s in the market and what investor are expecting.

Source: Deutsche Bank

Where are we in the equity market ?

Source: Citi

If you consider the above table, there are some pockets of reasonable valuation: EM looks clearly undervalued (P/E 2017e of 12.2x while EPS is expected to grow 15% + 2.8% Dividend Yield), even though there is a need to look market per market or even stock by stock (and in such a case, it’s probably to use the service of a highly regarded money manager in the EM space – there are quite a few available to investors).

Europe and Japan also look reasonably attractive. US looks expensive (17.9x 2017e earnings for 11.2% EPS growth expected this year).

Overall, equities might still have a nice run to go, provided world recovery is on the right track and that the political agenda doesn’t jeopardize it.

The end of 2016 has been marked by the US market sharp rebound following the election of Trump (due to his promises to spent money he doesnt’ have on infrastructure, lower taxes… which the market seems to have taken for granted although this has to go through the Congress approval first).

Therefore, if all looks ok for equities, there are still a number of unknowns that need to be cleared before investors get really confortable taking on more risky assets.

A lot have been done since the beginning of the financial crisis, but it seems that from now on, there is still a lot to be achieved.