There was no shelter from the global storm this summer that erased almost $11 trillion from share prices in the most volatile three months since 2011.
Oil suffered its worst quarter in six years. Other commodities also fell amid fears about China's economy. The big overhang was the endless speculation about when the Americans would finally raise interest rates.
Well, the book closed on that miserable stretch for financial markets Wednesday. As we head into the home stretch of 2015, what does the future hold? More of the same? Better days?
If you listen to Germany's Finance Minister Wolfgang Schaeuble, the worst is yet to come. Schaeuble says financial markets are getting unhealthy again, overheated by low interest rates.
“If you look at what's going on [on] at a global level . . . we are moving to the next bubble," Schaeuble told a recent conference. “I think we should learn lesson(s) from crises we had.”
Billionaire investor activist Carl Icahn joined in this week. He said the U.S. low interest rate policy is a treacherous path.
“God knows where this is going,” said Icahn, who has been a consistent critic of the U.S. Federal Reserve for keeping its benchmark interest rate close to zero since 2008. “It's very dangerous and could be disastrous.”
I bounced those pessimistic views off Myles Bradshaw, an Oxford-trained economist who was in Toronto this week as part of a summit by NEI Investments. NEI is a mutual fund company that sells the Northwest and Ethical groups of funds.
Bradshaw heads up global strategies in London for Amundi Asset Management, which manages some funds on behalf of NEI. Amundi is Europe’s largest asset manager and one of the world’s 10 largest.
Far from being a pessimist, Bradshaw sees a future of low inflation, low but gradually rising interests rates and a rebalancing of the economic landscape. That comes with bumps, but he believes the low interest rate policies of the past 10 years have been the right course.
“We have zero rates because we had a debt problem,” Bradshaw said. “There’s a side effect to that, but the counterfactual is if we didn’t have zero rates things would have been much worse.”
The U.S. economy “is healing and the conditions for zero rates are no longer there,” he added. “Their time is coming.”
Bradshaw says Germany’s focus on price stability and the American reluctance to raise rates are rooted in their 20th-century experiences. For the Germans, the lessons of hyperinflation during the 1920s, and the resulting political and instability in the ’30s leading to World War II means a bias to stamping out inflation at all costs.
In the U.S., the lesson of the Depression was unemployment that peaked at 25 per cent in 1933, so monetary policy is focused on job creation, with some inflation as the tradeoff.
Bradshaw says it’s true that traditionally risk-averse savers are heading into stock markets because there’s little choice if they want a higher turn. But that higher risk can be low to moderate. Consumer debt levels are high, but low interest rates mean the costs are lower than in the past.
Bradshaw admits the global economy is more sensitive then ever to rate increases, which means increases will likely be small and gradual. He points out that the ratio of American debt to GDP (its economic output), is about the same now as it was at the end of World War II. The ratio fell steadily as economic activity grew.
So what does that mean for us? In Bradshaw’s view three things:
• Lower returns: If market returns have averaged 7 per cent before inflation, expect a few points less.
• Expect to take more risk. If you want to beat a 10-year Canada bond yielding 1.5 per cent while inflation is at 2 per cent, you have to look elsewhere. That could be shares of banks or utilities with dividend yields of 4 per cent or a bond fund with a global mix.
• More geographic risk. The global economy doesn’t move in sync. Canada’s stock market is one of the worst performers in 2015, down about 10 per cent. Japan, Germany and the U.S. Nasdaq exchange among the best.
It might be hard to make these adjustments, Bradshaw says, but they’re necessary. It’s something we’re going to have to get used to as markets search for a new equilibrium.