The sharp sell-off in markets in 2016 shows some worrying signs of a repetition of the 2008 financial crisis, according to Andy Merricks (pictured). 
While a ‘relief rally’ is undoubtedly underway, the worst start to a year for markets in recorded history has clearly daunted investors so far in 2016, seven years since the bottom of the last major sell off in markets following the financial crisis crash.
Merricks, investment director at Skerritts Wealth Management, says the similarity between 2008 and 2016 is “uncanny” and apparent in the seemingly parallel behaviour of equites in these two years.
The graph below shows the performance of the broader UK equity market –as measured by the FTSE All Share index - in 2008 (in the top graph) and in 2016 (in the graph bottom graph).
The markets have in these two years similarly suffered a harsh sell off in the first few weeks of each year, before a minor bounce back, another sell off which has been then followed by a relief rally.
Performance of index in 2008 and in 2016
Source: FE Analytics
Merricks says he broadly thinks a 2008-style market crisis is unlikely but that 2016 is carrying plenty of risk.
“We’re worried that 2016 may have a nasty surprise or two in store as the year progresses. We’re not advocating a systemic crisis as in 2008, but a realisation that central bankers can’t help any more will hit home at some point. Markets will most likely hit the ctrl alt delete to reboot when they do,” he said.
“As we’ve seen in countless situations since the financial crisis though, if we are waiting for policymakers to act in anticipation of an event then we may have to wait a long time. Their normal course of action is to wait for a crisis, and then respond.”
“We’re not sure exactly what the next crisis will be, but a next crisis will surely happen as the world crawls out of the mess that it got itself in nearly a decade ago.”
The reasons for the 2008 crash and 2016’s sell off are quite disparate although there are many other similarities aside from the UK equity market behaviour, with bank shares largely leading the sell-off in both years as well as a tandem rally in the gold price.
Performance of indices in 2016
Source: FE Analytics
Jamie Hooper, co-manager of the £950m AXA Framlington Managed Balanced fund, thinks markets will escape a 2008-style sell off.
“There is no doubt that market conditions are currently volatile, with slower global growth, tightening liquidity, widening credit spreads and falling profits. Yet despite this backdrop, we do not envisage a return to the problems of 2008 nor a significant economic recession.”
“There is no corporate investment bubble to burst, nor rampant inflation requiring a rapid rate rise in interest rates.”However, a key worry for Merricks is that this time we are the in the early stage of deflation rather than inflation, and that the major central banks are losing the power to influence markets toward stability and low moderate rates of inflation.
“Central Banks are pursuing an unobtainable quest and, as we see through the introduction of negative interest rates, the unintended consequences of their linear approach could turn out to be quite damaging. Better that they target a range, if they need to target at all.”
Brexit or the heightened chance of it, Merricks adds, is likely to another source of worry for markets.
“We can’t ignore the impact that it may have on the equity, bond and currency markets connected to the UK as we move through spring to summer. Probably the biggest cause of uncertainty will not be whether we stay in or leave, but rather the changing perception of the outcome as the date draws nearer.”
“We’ve already had a clue as to what will happen to Sterling, as it fell sharply upon the announcement by Boris Johnson that he was joining the ‘out’ camp. Of more interest to us however is the discrepancy that exists at the moment between what the polls say will be the outcome and what the bookies say.”
“It does matter from a short term investment perspective though that one of them is clearly wrong. Deciding which one will have a fundamental effect on UK portfolios as, if the bookies are right, the drop in Sterling is almost certainly overdone and certain stocks and sectors will benefit once the result comes through.”
Performance of Sterling versus Dollar since Johnson’s announcement
Source: FE Analytics
Sterling has fallen again today, and not yet shown in our data, as the referendum on the United Kingdom’s membership of the European Union is now down to a 50/50 split of UK voters, according to the latest polls.
Merricks added: “If the polls are right though, this means that expectations of leaving will increase as polling day approaches, probably leading to further downward pressure on the pound and seeing share prices in the companies and sectors that will be major beneficiaries of staying in, fall.”
“Either way, 24 June will bring clarity and we suspect that markets may respond positively whichever way the UK votes as most of the price volatility will have happened prior to the date itself. We may, of course, be wrong, but we’ll not be increasing our UK exposure in the run up to the referendum.”
“We will however be ready to act quite quickly after the vote, whichever way it goes.”