Hello, and welcome to the Morningstar series, "Ask the Expert."
I'm Emma Wall and I'm joined today by Tanguy De Lauzon from Morningstar Investment Management
to talk about the FTSE 100.
Hello, Tanguy.
Good morning, Emma.
So, this week marks the 10-year anniversary of the previous FTSE high before the following
year we had a significant crash.
And I was thinking about during that time and the difference between the sentiment then
10 years ago and the sentiment now.
And the sentiment now seems to be this rally is very under-loved.
People are waiting for the correction to come.
But back then 10 years ago people were confident, people were liking the stock market and they
certainly didn't see the crash coming, did they?
Yeah, certainly.
I think the situation was a bit different.
I think at that time the economy was doing very well.
I think emerging markets have had a brilliant period the previous years.
Corporates were generally having very high earnings.
And actually, probably that was the trick.
I think corporates were doing so well, the earnings were so high at that time that when
people looked at valuation signals like price-to-earnings ratio, it looked okay actually.
But if you looked at other valuation signals, probably like the cyclically-adjusted price-to-earnings
ratio or price-to-sales or price-to-book, so looking at – whether looking at the recent
earnings, looking at average cycle earnings, you would have found that valuations were
quite higher at that time.
But the situation was certainly a bit different.
And you spoke there about some warning signals.
Were there ever other warning signals on the horizon that could have perhaps predicted
what was to come, the global financial crisis?
Yeah, I think, it's always difficult to predict a crisis.
Almost by definition, if a crisis occurs, it's because it's unexpected.
But you'd have, yeah, early warning signals.
So, valuation is one typical signal that we would look at.
I think market was also quite optimistic, sort of believed in the Goldilocks scenarios
where everything happens and everything is going well.
I think markets started to become a bit complacent as well about risk, about some of the financial
innovations and that should be things that one wants to consider to assess the environment.
And so, what happened next?
We had this high 10 years ago this week, but in the next couple of years were very difficult
for investors, weren't they?
Yeah.
So, obviously a big crash in the markets.
So, most equity markets down roughly by 50% over the next 18 months.
Fortunately, for U.K. investors the pound crashed as well.
For those who had foreign exposure, that was helpful.
But basically, we had this big series of events culminating with the Lehman failure obviously.
And so, it was a very tough period for a lot of investors.
But actually, for investors that remained with a long-term focus, really thought about
their investment goals and that the investment goal should always be about the long-term,
it was actually an okay period.
Because if you consider 3.5 years after the peak you are back at the same level if you
include dividends.
And so, it's really a tough period for a few years, but for long-term investors it was
actually possible to navigate through these difficult periods and to maintain investments.
And 10 years after we're actually 60% above that level.
So, it's close to 5% per annum.
So, not a fantastic return, but something okay for someone who invested for his pension.
It's always easier said than done with that though because as we know through a lot of
the behavioral science that we've studied here at Morningstar, when a crash comes, people
tend to take their money out.
They do panic.
So, what can we learn from that experience, from the figures that you just told us, about
the fact that the market now is looking similarly overvalued by a number of metrics?
Yeah.
So, I think that there's a few things to be prepared.
You need to be prepared for this and you can't really think about what you're going to do
as it happens.
So, I think there are a few things, a few key investment principles that you need to
have.
And a few of the ones I would highlight is keeping that long-term horizon in mind, remaining
focused on the long-term, that's very important.
I think valuation is probably the most useful tool in terms of assessing where we are.
Looking at the fundamentals as well not only to assess what's the most likely scenario
is, but what the range scenario is and trying to see whether there will be periods where
the chances of positive scenarios are becoming slimmer and when actually the chances of a
negative scenario, of a negative shock, are becoming larger.
And then the last I would highlight is to be independent-minded.
In these periods all the press, all the media is very negative.
You talk to your friends and families.
They are very negative.
And it's very difficult to keep calm, to control your emotions.
But if you're able to do that, then you should stick with your investments in those periods
and maybe actually there are some opportunity at offer to you to buy at very cheap prices
stocks that are actually might be quite attractive.
Tanguy, thank you very much.
You're welcome.
This is Emma Wall for Morningstar.
Thank you for watching.