17 Oct 2017 4 min read

Smash Hits and Crash Dips

By Bruce White

2017 marks a number of financial anniversaries; the 1987 stockmarket crash, the 1997 Asian financial crisis, and the beginning of the global financial crisis. As we haven’t really experienced an extreme boom or crisis recently, looking back will be a refresher as to what could occur, but also provide a wider perspective on investment returns. Nothing is as evocative of the past as its music, so we accompany our look back with a soundtrack of those hits we think have withstood the test of time, and those hits that we would rather forget.


1967: Pounds and pennies

The UK was basking in the first wave of cool Britannia, and some parts of it still glowing from the 1966 World Cup win. While unemployment and inflation was falling, and the economic outlook generally rosy, the economy was coming under pressure from a deteriorating balance of payments. Faced with heavy drains on foreign currency and gold reserves the government had to give in and devalue the pound from $2.80 to $2.40. Prime Minister Harold Wilson infamously claimed that a pound in your pocket or purse has not been devalued. UK equities didn’t seem to mind - rising by 29% over the year.

The high point in music was the Beatles double A-side of Strawberry Fields Forever / Penny Lane, it was from the Sergeant Pepper’s recording session, but not the album. It was the number two best-selling single in the year, beaten by our low point of the year in Englebert Humperdink’s Please Release Me. It all goes to show that the most popular song (or asset class) may not last the test of time.

1977: God save the queen

By 1977 both music and the economy had deteriorated. In the previous year the UK had sought an emergency loan from the IMF but at least there was the Queen’s Silver Jubilee to celebrate. Inflation reached a peak of 18% mid-year but came down to 12% by the end of the year as the government implemented income policies to contain inflation and industrial unrest. Despite that, UK equities had a bumper year rising by 46%.  

As ABBA dominated the decade, and as our compliance department may not approve a link to the Pistols' “God Save The Queen”, we have chosen the musical high point as ABBA’s Knowing Me, Knowing You. The low point was the Brotherhood of Man’s Angelo, a touching story but too similar to the previous year’s ABBA hit “Fernando”.

1987: The great storm

Come the late eighties the financial revolution unleashed by Thatcher’s reforms was in full swing. The economy grew at 5.5%, the strongest pace since 1963, yet inflation stayed relatively low at around 4%. The stockmarket was booming, gaining 49% in the first nine months of the year. The Great Storm hit the UK on 15 October causing widespread damage. Four days later came the 1987 stockmarket crash, UK shares lost 9.9% in one day, and experienced a total decline of 36% from peak to trough. However, the UK market still gained 8.4% over the year.

1987’s best hit goes to U2’s With or Without You and the worst single goes again to the year’s bestseller, Rick Astley’s Never Going to Give You Up.

1997: Things can only get better (?)

Much like thirty years before, the economy and music were looking pretty good. Cool Britannia and Spice Girls Mania were at their peak. Tony Blair became PM and the Bank of England was made independent. The economy was growing and confidence was on the up. UK equities were relatively stable through the crisis that engulfed South-east Asian countries in 1997, gaining 24% over the year, though the market did dip 16% from May to September the next year as Russia defaulted on its debt and the LTCM hedge fund went bust.

While only getting to number 43 in terms of singles sales for the year, The Verve’s Bitter Sweet Symphony is our choice as the keeper. The disposable, but catchy, Aqua’s Barbie Girl is our choice as the low point. It was the second best-selling single of the year, hang your heads in shame Britain.

2007: Cracks in the rock

By 2007 there had been 40 consecutive quarters of economic growth in the UK, and the Nationwide House Price Index had doubled over a decade, but the party had been going for a little too long. Outside of finance, Tony Blair gave way to Gordon Brown. The economy was still growing well but cracks in global credit markets were beginning to appear; this led to pressure on banks funding costs, cumulating in the run on Northern Rock in September 2007. The UK stockmarket gained 6% over 2007, believing that the problems were isolated to a few banks. The next year proved that assumption wrong as Lehman Brothers collapsed and the global financial crisis began. UK equities lost a total of 41% from October 2007 to the rock bottom in February 2009.

Our hit of the year was a suitably upbeat Valerie by Mark Ronson featuring Amy Winehouse, the fourth top-seller was the somewhat less memorable When You Believe by X-Factor winner Leon Jackson.

Now the albums

Stretching our music and finance analogy a little more; each year, its events, its highs and lows is just a short song. The investors’ journey is more of a compilation album. In the chart below we show the return on UK equities over each decade versus inflation. 

Returns starting in 1967 were good in absolute terms, but failed to beat the very high inflation that emerged in the 1970s. There was a lot of optimism in 1967, and not much ten years later. However, if you had invested at the beginning of 1977 you would have done extremely well, with a remarkable return of close to 25% p.a., easily beating inflation. It typically pays to invest when pessimism is high and valuations on shares are low.

Good returns continued from 1987, despite having the stock market crash and recession of the early 90s to contend with. Likewise the 1997-06 period was fairly benign, though the LTCM crisis, dot-com bubble and bust, 2002 corporate earnings scandals and 2003 Iraq war tested investor’s nerves somewhat. The ten years starting in 2007 had a very tough starting point with the heavy metal of the financial crisis just around the corner, yet despite this, UK equities still managed to beat inflation and provide mid-single digit returns. This shows that long-term investors can achieve good returns on equities, even when there is some turbulence along the way. And, of course, an investor in a diversified multi-asset fund will be less dependent on one asset class performing, and will experience reduced volatility compared to one asset class alone.

Bruce White

Fund Manager

Bruce is your not-so-Aussie Australian. While seemingly laid back, this serious(ly deadpan) fund manager likes to have trades lined up before most of the team have come in and is not impartial to a little mental acrobatics when it comes to powerpoint slide creation. His socks can be rather colourful…as can his language…

Bruce White