Infographic: Boom and bust Asia, 10 years after Lehman

As Asia marks a decade since being swept up in the Global Financial Crisis, we look at some of the key moments both before and since those monumental events.

September 15 marks the 10th anniversary of the collapse of Lehman Brothers, a red letter day in Wall Street history that changed the course of capital markets around the world.  

However time has not completely healed the wounds inflicted by the Global Financial Crisis and financiers should prepare for the next inevitable downturn.

History does not repeat itself, but it does rhyme, to borrow the words of Mark Twain.  

FinanceAsia has spoken to financial professionals to identify potential weaknesses in the public and private markets and has taken a look back at the past couple of decades [see infographic below] to learn from past mistakes. 

There are two headwinds coming out of the US that emerging Asian financial regulators need to watch closely: increasing trade tensions with China and US monetary policy normalisation said Ravi Menon, managing director at the Monetary Authority of Singapore. 

"If the threatened tariffs are implemented then we are looking at half a percentage point off GDP for China, and that will sweep down the supply chains and production networks across Asia and shave off growth in many of the smaller economies," said Menon.

Over the past decade quantitative easing has sent funds flowing into emerging markets and alternative asset classes such as real estate for the extra yield they offer. Hong Kong's sky-rocketing property prices atest to this.

Right on cue, emerging markets are coming under pressure as investors re-assess the risks from rising US interest rates. The crises in Argentina and Turkey have led to contagion, and investors have one question in mind: who’s next?

Broker Nomura's early warning system for exchange rate crises, called Damocles, has correctly signalled 67% of the past 54 crises including the Asian financial crisis of 1997 to 1998.

Currently, Damocles is signalling a crisis in seven countries: Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine. On the other hand, eight countries – Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, Philippines, Russia and Thailand – have Damocles scores of zero, Nomura said.

Most bankers expect rising leverage in the financial system to be the fault line that precipitates a surge in market volatility. 

Plenty of anecdotal evidence points to rising leverage on deals, banks are offering private equity funds buckets of debt for mega deals and the Hong Kong financial watchdog, the Securities and Futures Commission, is sounding warning bells on the widespread use of margin finance

Bankers offered investors in Ant Financial's recent $10 billion fund raise 50% leverage on their equity purchases, according to one person familiar with the deal. 

But it is property that is most likely once again to be at the heart of any future crisis given that for banks, property is a relatively easy asset to collateralise and it makes up a large proportion of their balance sheet. 

As quantitative tapering kicks in globally then property capitalisation (cap) rates will rise and property values fall. But their is a wild card.  

If the trade war escalates then central bankers could pause rate hikes Kenneth Gaw, president of Gaw Capital Partners at the Milken Institute 2018 Asia Summit in Singapore. "If things go seriously wrong in markets they will reverse," he said.

Global investors have long fretted about a potential crash in China's property market causing contagion, but FinanceAsia polls have shown their local peers are sanguine about such a prospect. 

"So long as the renminbi is not freely convertible, forget about any bubble bursting, it's not going to happen. The government can control everything, they have a lot of levers to pull," said Gaw. 

Former Lehman Brothers' bankers are flying to Hong Kong for a reunion marking the tenth anniversary of the bankruptcy of the storied Wall Street firm, according to one ex-employee.

One can only hope that this diaspora bring their first-hand experience of how excessive leverage can wreck financial markets to their new employers. 

 

 

A look back over Asia's growth and the boom and bust of capital markets

 

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