IN FOCUS6-8 min read

15 years since Lehman's: from 5% to 0.25% and back

Interest rates have gone full circle since Lehman Brothers' bankruptcy 15 years ago helped trigger the Global Financial Crisis. With the help of seven charts we look at what else has changed since then, and ask what comes next.

18/09/2023
15 years since Lehmans

Lehman Brothers filed for Chapter 11 bankruptcy protection in the US on 15 September 2008 in an event that helped spark the Global Financial Crisis.

From a UK perspective, Lehman’s UK businesses went into administration on the same day and UK bank shares plunged. Within months both HBoS and RBS had changed hands as the UK banking sector was recapitalised with taxpayer support.

UK interest rates fell 90% over the next six months from 5% to 0.5%. Only in July this year did the Bank Rate return to 5%.

The following charts reveal some of the powerful trends that shaped the global and UK investment landscape in the 15 years since. And, with interest rates now back at pre-crisis levels, we ask: what next?

UK investors have gone global

There’s been a dramatic shift between 2008 and today in where UK investors invest. The domestic bias has been turned on its head, with substantial outflows from the IA UK All Companies sector, while the IA Global sector has grown exponentially.

In 2008 the AUM of the IA Global equities sector was £11.7 billion, compared to £266 billion today. Meanwhile, despite strong overall market performance, the AUM of the UK All Companies sector has gone from £95 billion to just £97 billion over 15 years.

The charts below show how the tide has turned away from UK equities since the Global Financial Crisis.

IA global sectorIA UK all companies sector

Tech dominance: the rise of growth stocks in more than a decade of near-zero rates

With interest rates at or near zero investors were forced into riskier assets, particularly equities, to get the returns they needed.

Growth stocks, in particular, benefited. This is because when investors calculate the value of a company’s future cash flows, the “discount rate” plays a crucial role. In short, the lower the discount rate, the more valuable a company’s future profits are. So, in an environment where interest rates and government bond yields are at or near zero, a company’s future potential profits are highly valued. Hence the appeal of fast-growing companies such as the tech giants. The result is a remarkable dominance of these growth companies in indices.

As the chart below shows, the “Super-7” US stocks now make up more of the global equity index (MSCI ACWI) than the whole stock markets of Japan, the UK, China and France combined.

Weight in MSCI ACWI

Ultra-low interest rates have driven property values up (and affordability down)

Low interest rates kept mortgage payments relatively affordable, even for those borrowing large amounts. The result has been rising property prices, with the average house in the UK now costing around eight-times average earnings, based on data as at 30 June 2023.

Looking at 178 years of data, we can see that – before recently - the last time house prices were this expensive relative to average earnings was in the year 1883, 140 years ago.

UK house prices as a multiple of average earnings

UK house prices as a multiple of average savings

Companies have been turning away from the stock market as they look to private capital

The declining popularity of stock markets as a way for companies to raise capital is a global trend, but it is particularly notable in the UK and one that has continued in the past 15 years.

In 1996 there were over 2,700 companies on the main market of the London Stock Exchange. By the end of 2022 this had collapsed to 1,100 – a 60% reduction.

One important reason why companies have turned their back on a stock market listing is that another source of financing has become more widely available: private equity.

Private equity has grown from a $500-600 billion industry in the early 20002 to be worth more than $7.5 trillion in 2022. With this growth, the size of the cheques the industry can write has soared. It can now finance companies to a much later stage of their development than before.

Companies are not only attracted to private equity for the money. The best private equity investors also have deep sector expertise and take a much more hands-on approach to driving value. They are sought after by investors and companies alike.

Number of public companies

Global government debt has ballooned

Depressed interest rates not only made it cheap for consumers to borrow; governments took advantage too.

Figures from the IMF show that the government debt to GDP ratio for the Advanced G20 nations climbed hugely post the Global Financial Crisis, and surged further as a result of the Covid-19 pandemic. The ratio reached more than 130% in 2020, an increase of over 20 percentage points when compared to pre-pandemic levels in 2019. Government support through furlough schemes, fiscal transfers to households and the roll-out of vaccines account for much of the increase.

Pandemic and energy crisis have driven government debt to new highs since the GFC

15 years since Lehmans

What next for investing?

Although interest rates have gone back to where they started, the world is very different to how it was pre-Lehman Brothers’ collapse. It’s become a more complex place, increasingly shaped by huge forces such as decarbonisation, a retreat from globalisation, technological advancements and challenging demographics.

Meanwhile, here in the UK, the number of publicly-listed companies has shrunk, leading investors to increasingly looking beyond our shores and to private markets for investment opportunities.

Every asset has had to reprice to compete with a yield on cash in the bank. Valuation matters once again. Compared to the last 15 years, we may now need to be more flexible and active in the way we invest.

Important information

The views and opinions contained herein are those of Benchmark. They do not necessarily represent views expressed or reflected in other Benchmark communications, strategies or funds and are subject to change. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable, but Benchmark does not warrant its completeness or accuracy. The data has been sourced by Benchmark and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Benchmark is not responsible for the accuracy of the information contained within linked sites. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Issued by Benchmark Capital Limited, Registered Office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, England, RH12 4QP. Registered in England and Wales No 09404621

Topics

Benchmark Capital Limited, Registered Office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, England, RH12 4QP. Registered in England and Wales No 09404621

Best Practice IFA Group Limited is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered Office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, England, RH12 4QP. Registered in England and Wales No 04490633

Evolution Wealth Network Limited is authorised and regulated by the Financial Conduct Authority, the registration number is 591218. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, England, RH12 4QP. Registered in England and Wales No 08229133

Fusion Wealth Limited is authorised and regulated by the Financial Conduct Authority, the registration number is 541404. Registered Office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, England, RH12 4QP. Registered in England and Wales No 07469060