Life after the Global Financial Crisis - Colonial First State

FeatureWhat did the Global Financial Crisis (GFC) teach you aboutinvesting and financial markets? iQ discovers some of thelessons learned by the people closest to the action.The economistThe GFC’s most important lesson forinvestors was to take a long-term view,says Colonial First State’s Analyst, InvestmentMarkets Research, Belinda Allen. The crisisoccurred primarily as a result of a search foryields, she says. “Leading up to the crisis,risk was not being priced effectively inmarkets and we had very low interest rates.New products were created that producedhigher returns, but there were products thatinvestors did not understand.”From that experience, Belinda says thatpeople now have a greater understanding ofwhere they are invested and are more awareof the downsides. “We had a phase between2005 and 2007 where the Australianequity market returned consistently highreturns, 20% pa gains were the norm, butthat was abnormal. Investors realise thatnow. There is also a greater recognitionthat global economic conditions matter –we were affected by what was happeningin the northern hemisphere. However, ourrelations with Asia helped to pull us through,along with a strong financial structure andgood economic management from policymakers,” she says.Belinda emphasises that the crisis alsoreinforced the importance of adheringto your investment goals. “Even thoughAustralia didn’t experience the worst of thecrisis, if you had sold out when the marketfell, you would be behind those who heldon. Since the bottom of the market, justover one year ago, the market has risen wellover 50% back towards the highs of late2007. That’s where the value of an adviserlies – they would support you to stick toyour goals.”The financial adviserOne of the main lessons from the GFC forboth advisers and investors was a greaterunderstanding of risk, says CEO of theAssociation of Financial Advisers, RichardKlipin. “How to identify risk in all its forms– market risk, company risk etc – and howto mitigate those risks was one of the keymessages,” he says.The crisis also brought home to manyadvisers the advantages of having a clearvalue proposition and a defined strategyfor their clients. “These clients understoodthat their strategy hadn’t changed, it wassimply the environment around them,”says Richard. “It’s important that now, asspending and profits start to pick up again,investors don’t waste the lessons that wereso evident 12 months ago: understand riskand your approach to that risk, and focuson your investment goals.”The policy makerAssistant Governor of the Reserve Bank ofAustralia, Phillip Lowe, recently outlinedthree possible lessons for Australia. The firstwas the importance of flexibility. “As we allknow, unexpected developments occur fromtime to time and investors’ attitudes to riskcan change quickly. Given the inevitableuncertainty in the world and the largeswings that can occur in financial markets,having the flexibility to adjust to changingcircumstances is critical,” he said.Why did Australia remain relativelyunscathed? Lowe cited Australia’s floatingexchange rate; low levels of public debt;a credible monetary policy framework whichallowed policy makers to move effectively;and flexible labour and product markets.Lowe’s second lesson relates toappropriate regulation. North Atlanticfinancial systems show what can happencolonialfirststate.com.au iQ 5