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What Comes After The Financial Crisis?

Someone once said: “A child can ask questions that a wise man cannot answer.”

Children have a wonderful way of making difficult things seem quite simple. I recently overheard a father tell his very young son, in quite great detail, their proposed itinerary during their short stay in Singapore.

It was quite an ambitious programme. But after revealing each item on the packed agenda, the young boy’s response was always “…and then what?

Going local

Many of us have been asking the “…and then what?” question, since the onset of the financial crisis.

The debacle, which started off as housing problem in the US, widened to infect other financial institutions that included insurers and investment banks. And then what?

Unprecedented events

It sparked an unprecedented and almost uninterrupted chain of events that swept like wildfire across the globe.

It might have had its roots deep in the troubled American housing market. But the credit crunch that ensued brought down Lehman Brothers, which sent shock waves around the world. And then what?

The contagion quickly spread to European banks. People then began to ask uncomfortable questions about whether any European banks had exposure to the US housing market too.

One thing led to another

One question led to another. Before long, questions were being asked about whether some of these banks were disproportionately large and whether some sovereign states were even solvent. Some were. And then what?

Weakness in the Eurozone and the US put at risk the delicate balance between the developed and developing markets. In other words, it triggered crises in some emerging markets that were further exacerbated by a collapse in commodity prices, which was caused by a slowdown in China.

Illogical consequences

Logic would have suggested that the crisis, which affected global economies, should have brought down every financial asset known to man. But it didn’t.

Instead, a cocktail of measures introduced by the US Federal Reserve and other central banks boosted the value of financial assets, at a time when, ironically, economic conditions were nothing short of dire.

Essentially, Quantitative Easing drove up bond prices, which drove down bond yields and interest rates much to the delight of borrowers but to the angst of savers.

Free money

That forced investors to take on more risk in search of better returns. Any return, it seemed, would do. With Financial Armageddon no longer a pressing issue, more buying of financial assets sent prices even higher. And then what?

Currently, economic conditions are improving at a time that financial assets are losing their appeal. The US has raised interest rates, which is driving down bond prices and, probably, some property and stock prices, too.

We might even get some modest inflation, if we are lucky. That doesn’t spell a disaster for stocks, though. And then what?

Micro not macro

We are now moving into an interesting phase where microeconomic factors are probably going to be more important than macroeconomic events. Or put another way, investors are likely to be more discerning.

Over the last seven years, it was pretty much a case of any asset would do. Risk was a secondary concern, given that money was effectively free.

But now that America has signalled the end of free money, picking the right stocks will become increasingly more important.

It will be important to know the difference, say, between the ways that SingTel (SGX: Z74) and StarHub (SGX: CC3) generate revenues? Elsewhere, Keppel Corporation (SGX: BN4) and Jardine Matheson (SGX: J36) are both conglomerates. But what are their respective risk profiles?

Consequently, it is important that we pay closer attention to fundamentals because just buying any old asset, which worked well over the last few years, will not be enough, anymore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.