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Why a 2008-style crash is not on the cards

Peter Elston, chief investment officer at Seneca Investment Managers, tells FE Trustnet that the market’s collywobbles are likely to be a psychological overhang from the financial crisis, and explains why investors should be buying the dips right now.

Lauren Mason

By Lauren Mason, Reporter, FE Trustnet
Monday January 25, 2016

Today’s consumer sentiment is largely an overhang from the global financial crisis eight years ago, according to Seneca’s Peter Elston.

The chief investment officer, who is also an executive director on the Board of Seneca Investment Managers, remains hopeful that the global economy will show resilience against potential headwinds this year.

This counteracts the sentiment shown in markets since the start of 2015, which have remained sideways and choppy as a result of fears surrounding plummeting commodity prices and a weakening China.

Performance of indices since 2015

Source: FE Analytics

“The number of people I speak to who are very fearful of a repeat [of the crash] tells me that when you have some sort of trigger, as we have done recently in the form of the falling oil price as well as the China slowdown, there is much greater scope for investors to overreact just because of their very fragile psychology relating to what happened during the crash,” he said.

Elston (pictured) points out that, despite the current macroeconomic events which could prove a problem, there are also a number of reasons why he believes the global economy won’t continue spiralling downwards throughout 2016.

One reason he gives is that we’re currently experiencing a steep yield curve, which is when the spread between long and short-term assets increases, as this often indicates economic growth.  Elston says that investors shouldn’t generally worry unless the yield curve becomes inverted, which is when long-term fixed income assets have a lower yield than short-term fixed income assets of the same quality, as this is often an indicator of a forthcoming recession.

Another reason, he adds, is that the current output gap, which measures the difference between the real output of the economy and its highest potential output. It currently stands at around minus 2 per cent – a negative output gap occurs when the economy’s real output is less than its potential output.  

“The IMF [International Monetary Fund] has a series which looks at the global output gap,” Elston explained. “You don’t have to get nasty bear markets happening until the outlook gap gets to about plus 2 per cent, which would mean that economies are operating way above capacity.”


“In 2000 at the start of the tech bubble burst, and in 2007 at the start of the global financial crisis, the global output gap was about 2 per cent in both instances.”

Performance of markets since turn of millennium

Source: FE Analytics

“During the depths of the crisis the global outlook gap dropped to minus 4 per cent, and we’ve since seen quite a good recovery to minus 2. However, we’re still an awfully long way from the point at which economies are overheating, economies need restraining, and central banks really step in to deal with inflationary pressures that would be evident in the economy.”

The next step that needs to happen to further bolster the economy though, according to the CIO, is for further fiscal policy to be introduced, which he believes will complement the continuation of loose global monetary policy.

“I’m quite hopeful that monetary policy is going to remain very supportive. What I do think needs to be done is for fiscal policy to become much more stimulative. That’s not going to happen immediately, but the reality is that private sector demand is weakening at the moment, and that means one thing: the government has to step in to stimulate demand through more fiscal policy,” he argued.

 “I would expect over the course of the next 12 months to see governments starting to stimulate fiscally because, on the whole they’ve been extremely responsible so far, which I think is the reason why you haven’t seen inflation pressures building, as might have been the case in years gone by. But when you do see a decline in private sector demand, the government has to step in.”

As a result, Elston expects fiscal policy to be introduced this year, and believes that loose monetary and quantitative easing will continue to remain supportive.


His fairly positive outlook for the year has led him to buy the dips and increase his equity exposure from a 2 per cent overweight to a 4 per cent overweight. He has done this through two UK stocks, although they can’t be named as Seneca’s portfolios haven’t been fully repositioned yet.

Elston warns that investors who are adopting a cautious stance this year are “absolutely, definitely” missing out on some stellar value opportunities in the markets at the moment.

“It’s quite hard, almost impossible, to predict when you’re going to get these sorts of sharp market declines. What you have to make sure of is that if you’re one of the many many people who are not able to anticipate these declines, you can at least take advantage of them when they occur by increasing your equity exposure,” he said.

“The biggest mistake people make is to sell at the worst possible time, which of course doubles up the problem. Firstly you’ve lost a lot of money, and secondly you’re not giving yourself a chance to benefit from the rebound. “

“The global financial system isn’t great but I think it’s a lot stronger than it was back in 2007. If you think about all of the measures that have been put in place since 2007, we don’t have anywhere near the same number of potential headwinds to deal with.”

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