This Saturday marks 10 years since US investment bank Lehman Brothers imploded, sending markets around the world into freefall and exacerbating the descent of the Irish economy, which had already run into trouble as fears around Anglo Irish Bank strengthened during 2008.
While asset values plummeted in the aftermath of the financial crisis, they have recovered robustly since. In Dublin, house prices fell off a cliff post-2008 but have doubled since February 2012, although they remain off their Celtic Tiger highs. Across the Atlantic, US stocks have not just recovered, they continue to reach new highs.
But what has the experience been like for Irish investors? Have they benefited from roaring asset prices? Have they taken unnecessary risks? Or have they been too cautious and lost out on what many assert is the longest bull run in US stocks in history?
Lessons have been learned
For Brian Weber, head of Quilter Cheviot's Dublin office, an upside of investors going through the financial crisis is that they have became far more cautious.
“Investors are now opting for more diversified strategies than some of the high-risk strategies and products that were prevalent in the boom. This is a very positive outcome. Investors and investment providers generally learned very valuable lessons, particularly in relation to the negative impact of leverage in a market downturn,” he says.
Weber recalls being “regularly frustrated” during the boom years as he met people who rattled off the unrealistic high double-digit returns certain leveraged investments were going to produce.
“Needless to say, it didn’t take too long to be happy to have avoided much of this excess and it is fair to state that, in 2018, we encounter a more risk aware and knowledgeable investor.”
But have they been over-learned?
But, for all the positives a more cautious approach can bring, there can be downsides too.
"Many Irish investors are still slightly paralysed by the financial crisis," says Ian Quigley, head of investment strategy at Investec, adding that "those who lost money then often associate investing solely with risk".
This means they might now be overly-cautious, which can be also be a risk to the performance of their investments.
“People have over-learned the lessons of the financial crisis,” he says, adding, “people have misunderstood what prudent and cautious means”.
Weber agrees that investment risk may have become too much of a focus in the aftermath of the crisis.
“With so many industry participants and commentators focused upon the downside in equity and property markets, lower risk asset classes attracted a disproportionate amount of investment in the years immediately following the crisis. Investors may have missed some of the recovery for this reason.”
Not investing has cost us
With so much money sitting in cash, many Irish savers and investors will have missed out on the longest bull run in history in US markets. The S&P 500 has now gone nearly nine and a half years without a fall of 20 per cent or more, making it the longest rally ever. And yet “so many people haven’t participated,” says Quigley.
If you had invested $10,000 in March 2009, when the rally started – and hadn’t lost your nerve during the multiple wobbles since – you would now be sitting on $27,400. And if you had re-invested all your dividends during that time, your money would have grown to $35,180*.
What kept many Irish investors out of the bull market, however, was the deposit rates offered by Irish based banks in the aftermath of the crisis.
Back in 2009, for example, Ulster Bank was offering a rate of 5.5 per cent on deposits – even though the European Central Bank rate was just 2 per cent. It made little sense for a risk averse investor to throw themselves into the markets.
Since then, however, deposit rates have fallen sharply. Irish rates on saving are now among the lowest in the euro zone – and yet Irish people still have a lot of money on deposit.
We have too much on deposit
Latest figures from the Central Bank, for March, show that deposits are at their highest level since records began in 2003, at €95 billion. It’s the 14th consecutive quarter of annual growth.
Irish people now have more money on deposit today than they did back in 2009, when the figures last breached €95 billion – at a time when banks were paying over the odds to get their hands on savers’ money.
Now the best rate on offer is a miserly 0.3 per cent. It’s astonishing to think that so much money is being held in cash when most people are now actually losing, or are close to losing money, by virtue of keeping money on deposit.
With many deposit rates now in negative territory when adjusted for inflation, Quigley says people who are now in their 60s may never again make money on deposit.
“It will ultimately hurt them,” he says. His view is that interest rates will stay behind inflation for much longer than many realise which puts the real value of people’s money at risk.
As a recent Irish Times survey showed, a saver with €10,000 on deposit could lose €90 by next year if inflation rises as forecast.
But it may not be too late
Investors who have sat out this bull market may fear it’s now done. Indeed one characteristic of today’s investor, as Quigley notes, is that rising prices can make them as nervous as falling ones.
However, valuations of global stocks are around long-term averages, says Quigley, although he concedes that the valuations of US stocks may be a “bit” higher than averages.
So investing for the long term can still make sense now.
“Equity investors should have at least a five-year time horizon in mind,” Quigley says. “Having a shorter time horizon or need for the funds increases the risk of selling at the wrong time, turning a temporary loss into a permanent one.”
While Brexit is one big uncertainty out there, Quigley doesn’t believe it will have that big an impact on global markets.
In terms of the UK, he notes that certain assets now appear attractively valued. But, given the uncertainty that surrounds Brexit, and whether or not it will be of a no-deal variety, he believes investors can, for the most part, find a better risk/reward balance outside UK markets.
For those who have been invested in the UK – particularly those who had been investing with a specific purpose in mind, for example a deposit for a house or an extension – he suggests it might, however, be a good time to take your profits.
We still like (unleveraged) property
Irish house prices were only beginning to topple back in 2008; it took the dawn of the debt crisis and the arrival of the International Monetary Fund to send them into a tailspin, which didn’t bottom out until around 2012. Since then however, prices have recovered strongly both in Dublin and, latterly, across the State, although they remain some way off those 2008 levels.
In Dublin for example, the mean or average house price stood at €438,935 in June of this year. Back in 2008, it was €444,207 in Dublin and €348,804 across the State. Rents now significantly surpass their Celtic Tiger highs.
Such a strong price and rental market has brought investors back in. However, there have been changes – in people’s expectations for one.
“People understand that property can be a two-way street. It’s not a guaranteed up escalator,” says John McCartney, director of Savills Ireland Research.
Trends in investors have also changed. As McCartney notes, as the scale of the private rented sector in Ireland has gotten bigger, so too have demands for better regulations and standards. From a landlord’s perspective, this has increased the running costs of such investments.
“It has driven a greater wedge between the gross yield and net yield,” he says. “While it’s only right and proper, it still and all has raised the costs.”
And, when combined with the costs of financing, it can make it difficult for some investors to turn a profit.
“If the loan to value is above 40 per cent in a lot of locations it will make it difficult for an investor to be cash positive on those investments,” he says.
This means that many of the Celtic Tiger investors have left the market.
“What we have seen is investors who may have got into the business during the boom times, with a lot of debt, are gradually coming out of those investments,” he says, “because they’re just not profitable”.
While property also offers potential for capital appreciation, “it’s a leap of faith to assume that capital gains will materialise”, advises McCartney, adding that, in any case, investors won’t crystallise any gains until they make a sale.
New generation
But it seems that for every investor leaving the market, a new one is coming in, as a new generation of cash-rich investors, unenthused by the low rates of return on offer in other investments, turn to property.
“Investing with cash remains a very attractive investment because of rising rents, which has driven up yields,” says McCartney. “This means that the total returns are very attractive relative to the risk.”
Cash buyers haven’t spent all their money yet, and accounted for 48 per cent of transactions in the first half of this year, according to figures from Savills.
With deposit rates so low, however, there is a risk that people might be eschewing a diversified portfolio approach in favour of putting too much of their eggs in the one property basket.
Another change is the move away from the product-led selling of packaged property investments, via syndicates, or otherwise.
“I’m sure it’s happening, but as far as I know it hasn’t come back to prominence,” says McCartney.
* As of August 24th
