We’ve only just commemorated the 10th anniversary of the GFC but we may not need to wait long for the next financial crisis to hit.
Based on a model that JP Morgan has created, the investment bank is predicting that the next global market meltdown will occur in 2020, according to a report in Bloomberg.
If this comes to pass, it will end the longest bull run in US history and probably send our market into bear territory after the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index surged by over 60% since the GFC.
This is troubling news as the world’s economies may have a tougher time dealing with the fallout of the next recession as interest rates are lower than what they were in 2008.
This means central bankers have less scope to cut rates to stimulate the economy and this is particularly an issue for Australia as our cash rates are sitting at record lows with the Reserve Bank of Australia unlikely to lift rates until late 2019 or 2020.
The US Federal Reserve is in a better position as it is already lifting rates but the Fed Fund Rate is unlikely to get to over 5% in a long time – and that’s the level it was at in 2008.
But there’s some good news. The looming crisis won’t be as bad as the GFC, according to JP Morgan’s model, although the investment bank warns that it may be underestimating the fallout because the impact from the reduced level of market liquidity since the GFC is difficult to quantify.
JP Morgan blames the popularity of passive investing at the expense of active investing for the liquidity problem.
Investors have moved away from active fund managers since the GFC and have opted for exchange traded funds (ETF) and other index investing products.
This means there are less investors in the market that are able to buy the dips and support the market, noted JP Morgan – although that might be a self-serving argument (not that I necessarily disagree but I will point out that the lack of liquidity could also limit the sell-off from sell-first, ask-later investors).
JP Morgan is predicting a 20% tumble in US equities, which is mild compared to prediction for a 35% crash in energy prices which may not be a bad thing for households struggling with higher energy bills, although shareholders in Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO) won’t be happy.
However, our dollar is likely to fall too in sympathy with the 14.4% retreat in emerging country currencies that JP Morgan is pencilling in. The weaker dollar should cushion some of the losses as commodities are priced in the US currency.
Another silver lining is that JP Morgan’s prediction supports my belief that we have at least one more up-leg for our market and that any near-term market weakness should be a buying opportunity.
We’ll worry about 2020 next year.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.