What the BFIA has discovered over the past 25 years

Since BFIA's inception, the financial markets have experienced two severe bear markets and a pandemic

Kaylie Pferten examines the major patterns and takeaways from a particularly tumultuous time.

In Alan Bennett's play The History Boys, a vulgar schoolboy says, "History is just one fking thing after another." It can feel the same when looking back over the previous 25 years. Over the 25 years that BFIA has appeared on newsstands, a lot has happened, from Iraq to the euro crisis, from Brexit to bitcoin. However, news articles are not all made equal.

I would contend that the financial crisis that started in 2007 was the major turning point of the previous 25 years, hazarding a somewhat more elegant periodization than Bennett's character. Recent history for the UK in particular can be neatly divided into two eras: the years preceding and following the Great Crash.

London loses its monarchy.

London could legitimately claim to be the hub of international finance in the early 2000s. In 2007, it was the top of Z/Yen's first Global Financial Centers index (GFCI).

The argument went that London was the capital of the world, even though America was the superpower. With the aid of the English language and a great time zone, Britain's economy was comparable to the Wimbledon tennis tournament, a stage for major international competitions.

Yes, the past is a foreign land. The "Sir Humphreys" in Whitehall used to talk about surpassing New York, but now they shudder at disparaging comparisons to Greece. The London Stock Exchange worries about becoming obsolete. At £5 trillion, Nvidia alone is far more valuable than all of London's blue chips put together. Deal volume was only £248 million in the first nine months of this year and has never returned to its 2006 peak of £51 billion.

Princes Group, a supplier of canned tuna, has been one of London's most noteworthy listings this year, even though the technology megabucks are flying on Wall Street. Although the company is entirely respectable, officials' attempts to portray this sturdy, uninteresting flotation as the beginning of a significant renaissance seem a little desperate.

The UK's living standards have stagnated since 2007, which is most telling. According to Aadya Bahl on an LSE blog, "British workers would be 16 percent more productive today if the pre-2007 productivity trend had continued." In Britain, the impact of 2008 is far more apparent than in America, where growth eventually rebounded. Since its 2009 low, the SandP 500 index of US stocks has increased by almost 900 percent (compared to 153 percent for the FTSE 100). All of the UK's bets were on the wealth the City produced.

After that wager failed, the nation found it difficult to find a new place for itself. In contrast to Britain, which has more closely resembled a middle-aged man switching between odd jobs following an involuntary redundancy, the ever-tiggerish Americans recovered from the banking catastrophe by reinventing themselves as shale-oil prospectors and smooth-talking tech venture capitalists.

Too easy money.

Gordon Brown, the former prime minister, talks at LEAD 2024.

As the Great Recession began, Gordon Brown's arrogant claim to have eliminated "boom and bust" was widely mocked. However, the idea of a "Great Moderation" (based on the purported inflation-fighting genius of central bankers) was all the rage, and the chancellor-turned-PM was merely reflecting the larger economic establishment.

After the subprime crisis, central banks used money-printing through quantitative easing (QE) and ultra-low interest rates to treat us to more financial magic. Every time the markets began to feel uneasy, more tranches were added. The Bank of England's QE portfolio had grown to 895 billion, or 40% of the UK GDP, by the peak of 2021. Inflation did not immediately skyrocket, despite the worst predictions. It was more subtle what occurred.

Risky behavior went unchecked for years because credit was virtually unrestricted. The period of extremely low interest rates on Wall Street gave rise to some incredibly foolish businesses and unrealistic business plans. The most infamous was WeWork, a badly managed office building that managed to persuade venture capitalists that it was a ground-breaking technological innovator. The concept received tens of billions from investors prior to its 2023 bankruptcy filing.

The influence on the actions of the government was even more detrimental. Bond markets were anesthetized by easy money, relieving states of the pressure to control spending. This was deliberate, despite not being publicly acknowledged. The idea was that low borrowing costs would encourage governments to borrow and spend more, ending the post-crisis slump in the global economy.

Governments overspend on debt.

The global savings and borrowing balance did not significantly change until there was a pandemic. The world's finance ministries are the only place to look if you're wondering why interest rates and inflation have recently skyrocketed. Governments gave tens of millions of workers a year off by using furlough programs. Then came the energy shock following Russia's invasion of Ukraine in 2022, along with an aging population and an urgent need to find additional funding for defense.

The end effect has been a surge in public borrowing. The public debt of the UK was 37.7% in 2000. The Office for Budget Responsibility warns that if current trends continue, it will reach 270 percent of GDP by 2070. Currently, it stands at 103 percent. In the majority of the developed world, the story is similar.

Gold prices have been rising, which is a reflection of deteriorating government credit. At £289 per ounce (oz) in 2000, the yellow metal was inexpensive. It is trading at £4,035 per ounce. With a gain of 1,294 percentmuch higher than the S&P 500's 365 percent return during the same periodit may be the trade of the century thus far. Even though BFIA is a huge fan of yellow metal, we have to acknowledge that vertigo is starting to set in at the current levels.

Supporters of Bitcoin will claim that it is the trade of the millennium. When it comes to adopting the extremely volatile cryptocurrency, BFIA has been cautious. The idea that bitcoin is "digital gold" is dubious. Instead of acting as a hedge, Bitcoin typically acts more like a risky asset, rising and falling alongside frothy tech stocks.

But it's becoming difficult for us to remain skeptical. The digital currency has returned more than 500 percent since its initial surge in 2017. "Meme" coins from Modish can perform even better. Rather than creating a fortune from nothing, investing is about maintaining and increasing pre-existing wealth. However, you can become wealthy overnight if you choose the correct meme coin. However, you can also accomplish that with a lottery ticket.

The peak oil era is over.

Over the past 25 years, Gordon Browns' claim that the boom and bust will end is by no means the only questionable forecast. Due to the depletion of current reserves, "peak oil" was a recurring concern in the 2000s. According to reliable estimates, production would peak in the late 2000s and then decline. In fact, oil prices skyrocketed at the end of the decade, going from £30 per barrel in April 2004 (when BFIA advised readers to purchase) to over £140 per barrel in 2008 (just before it advised readers to sell).

Peak oil, however, was not to be. All of that talk about impending shortages only encouraged capitalists to search for more. Cowboys from Texas flooded global markets with shale in the 2010s. It is currently believed that the early 2030s will likely see peak production.

Peak oil was overdone, but the prediction that energy would become more scarce has come to pass. More marginal reserves, like shale, need a higher price point to be profitable as less expensive production sources were depleted. By today's standards, Brent crude prices at £64 per barrel are considered inexpensive. However, that is still a lot more than its November 2000 price of £29 per barrel.

Divergent emerging markets exist.

China's skyline at night in Beijing's Central Business District.

The emergence of emerging markets (EMs) coincided with the introduction of BFIA. As China joined the World Trade Organization and Russia and Asia emerged from financial crises, the first ten years of the new millennium were a golden age for developing economies. EM stocks increased by 200% between January 2001 and the end of 2009, while developed market stocks only increased by 4%. Though it turned out to be more complicated than anticipated, the emergence of EMs has continued to be a significant theme.

For starters, growth has a frustrating propensity to not result in equity gains. Since the beginning of 2010, the EM index has only made a pitiful 28% return. The complex's leadership has shrunk as South Africa, Brazil, and Russia have all stagnated.

However, China has continued to expand despite numerous forecasts of an impending "China crisis," though the current real estate bust is proving to be the most severe test to date. The "middle-income" level, which is characterized by GDP per capita of between £1,000 and £13,800, traps many developing economies. As of last year, China's GDP per person was £13,300, putting it on the verge of becoming one of the world's high-income nations.

The second-largest economy in the world has become a global leader in AI and electric vehicles since Covid. Due to this, investment returns have not been particularly thrilling (the CSI 300 index is still 13% below its peak during the 2015 investing frenzy). However, none of the geopolitical facts are more important for the future than the Middle Kingdom's increasing influence.

Avoid buying at the top.

In the end, other popular narratives from today might also turn out to be inaccurate. Silicon Valley tech executives are currently concerned that low birth rates will starve the working-age population's economy while also warning that automation may result in a future without jobs. They claim incoherently that there will be a persistent labor shortage and widespread unemployment in the future. There can't be both issues at once.

What about Britain? In an attempt to be upbeat, one could contend that pessimism has gotten so bad that it won't be difficult for growth to surprise on the upside. Over the past five years, the FTSE 100 has generated a respectable 75% return.

However, it has performed appallingly this century. The blue-chip index has given investors a pitiful annualized return of 1.75 percent over a 25-year period, up 52 percent since BFIA's launch (though generous dividends on top do lessen the pain of slow capital growth). The index has recovered 165 percent since the 2003 low.

Japan, a longtime favorite of BFIA, is the nation that knows the most about investing misery. After 34 arduous years, the Nikkei index reached its 1989 peak last year. Since Shinzo Abe began economic reforms in 2013, the Topix share index has returned 275 percent, but it has taken a long and difficult time to get there.

The investment industry frequently reminds us that stocks typically yield an appealing rate of return over the long run. However, that is an average. Purchasing near the top puts your portfolio's recovery time at risk of being measured in decades, as grinding returns in the UK and Japan have demonstrated. People who are currently investing heavily in the US tech frenzy have been cautioned.