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1 April 2020 = 27 October 2008 Redux?

Raphael Fiorentino
11th March 2020 - 4 min read

Lehman’s bankruptcy on 15 September 2008 and AIG’s 60% share price drop on the following day were setting the stage for a torrid month of October as the financial crisis went global. While most of the damages were done by the time “peak liquidity crisis” was reached in 27 October, some sectors (e.g. EU banks) never recovered.

Over the past month, the US energy sector has seen share price declines of 50% (Schlumberger, EOG) to 70% (Occidental, Cenovus) and the MSCI World Bank index dropped 33% as covid-19 went global. Is this just the beginning of a torrid month of March and can we hope for a “peak epidemic crisis” by April 1?

Butterwire’s indicator of global growth expectations (iGDP, current value +1.2%) dropped -180bps in two weeks. This is not exceptional and indeed happened on 4 other occasions since 2005 (Aug-07, Sep-08, Jun-10, and Aug-11). But looking at “Spot” iGDP values (the actual iGDP value on the day vs. the reported value which is smoothed by taking its EWMA), current levels (-20.7% as of 9 March) have only been witnessed during the global financial crisis, from 6 October 2008. The graph below shows how the latest Spot iGDP values have been tracking those of both the Sep-Oct 2008 and Sep-Oct 2011 periods so far. Spot iGDP only reached -20% for one day during the eurozone debt crisis (4 October 2011, when the structure of future government bail-outs was agreed between eurozone countries) whereas it continued to get increasingly worse for another 3 weeks in 2008 (cascade of EU/UK bank and sovereign emergency bail-outs, from Iceland to Pakistan, etc.).

“Spot” iGDP (t0 set on the day when -20% is reached, e.g. 9 March for 2020)

Spot iGDP

By 6 October 2008, the MSCI ACWI index had already lost -20% and would end up losing another -20% over the following 15 trading days, for a total loss of -50% by March 2009. Meanwhile the MSCI World Banks index was only down -12% as of 6 October, outperforming the broader index by 8%. The index however went on to lose -65% relative to its September 2008 value over the following months (1.3x market).

% Cumulated Returns: MSCI ACWI vs. MSCI World Banks

Index Returns

As of 10 March 2020, MSCI ACWI has lost -15% but the MSCI World Banks index has already lost -34% (2.3x market), as record levels of (US) corporate and (US subprime) consumer leverage, plummeting energy prices, record-high equity valuations, and a global banking system crippled by the rise of negative yielding debt clashed with the abrupt economic slowdown started by China’s covid-19 outbreak.

Fast-mounting fears of deflation and insolvencies are fuelling hopes of drastic easing by Central Banks at a time when their margin of manoeuvre looks a lot more limited than 12 years ago. New non-conventional policies are already being considered to try and prevent deflation without sowing the seeds of a future runaway-inflation.

Extreme levels of stress in global financial systems amidst mounting fears of deflation

Stress Graphs

And so while the current state of iGDP still leave the possibility of a V-shaped recovery as in 2011 thanks to proactive Governments/Central Banks, the ferocity with which some of the underlying variables have been evolving, plus the fact that financial institutions have no influence of the timing of “peak epidemic crisis”, means that a October 2008 redux cannot be discounted.


Against this backdrop, the percentage of outperforming stocks is very low (40% globally over the past month) and until “peak crisis” is reached (i.e. the above indicators show signs of normalising):

  • Stocks with high recession resilience scores are the most likely to outperform (the high recession-resilient stocks added to our global index at the end of last month are up 2.1% relative month to date), even more so for those with high financial fitness scores
  • Stocks with a recovery score (i.e. the bottom 20% performers of the past 12 months) are the most likely to underperform (global recovery stock index down -11.6% relative month to date), along with stocks assigned a “Potential Short” status (global short index down -6.7% relative month to date) and stocks with an Exit? alert (currently representing 30% of the covered universe)

Candidate Indices

The Explorer feature of the application which has been designed for rapid, intuitive, granular shortlisting and triage of stocks, can be used to both respond to the current environment and prepare, for instance to a potential bottoming-out next month.

For instance, by specifying “No small caps”, “Interesting” long candidates, “No alerts”, a recession resilience score of “over 7.5”, etc. a target shortlist of recession-resilient stocks can be established and downloaded in seconds.

Explorer output (10/3/20), showing 10 of the 169 stocks shortlisted


Further, (model/reference) portfolios can be instantly calculated to best match the specified investment strategy and target number of holdings, by simply pressing the Extract button at the bottom of the page.

Example of portfolio generated from the above shortlist (as of 10/3/20)

Portfolio Example

Finally, the Portfolios feature can be used to identify and/or qualify appropriate disposal candidates as well as new potential additions, for instance to mitigate a high portfolio exposure to iGDP.