Ten years after the last financial crisis, strategists at JPMorgan predict that another one could happen in 2020. The prediction was made through a model that gauges the timing and the severity of the next financial crisis.
However, unlike 2008 and past episode, the next one will be less painful according to their analysis. Still, diminished market liquidity since the last episode of 2008 will be tough to deal with.
The model the strategist are using calculates the outcomes based on asset price valuations, the degree of leverage, the potential duration of the next recession, the level of deregulation, the level of financial innovation and the length of expansion before the crisis strikes.
Model Estimates Published
Assuming an average length recession, the model estimates how a few asset classes will perform in the next crisis.
- U.S. stocks will slide by about 20 percent.
- U.S. corporate-bond will yield premiums of about 1.15 percent.
- Energy prices will tumble by 35 percent.
- Base metals will slump by 29 percent.
- There will be a 2.79 percent point widening in spreads on emerging-nation government debt.
- There will be a 48 percent slide in emerging market stocks.
- Emerging currencies will drop by a 14.4 percent.
Federico Manicardi and John Normand who are both strategists at JPMorgan wrote that “across assets, these projections look tame relative to what the GFC delivered and probably unalarming relative to the recession/crisis averages.”
They add that during the previous recession and the ensuing global financial crisis the S$P 500 fell by 54% from its peak. “We would nudge them all at least to their historical norms due to the wildcard from structurally less-liquid markets.”
In a separate note written by Marko Kolanovic of JPMorgan that addresses the potential for a future “Great liquidity crisis”, he says that there has been a shift away from actively managed to invest and this has raised the danger of market disruption.
The shift has come through the rise of exchange-traded funds, index funds, and quantitative-based trading strategies.
The 2008 financial crisis saw the birth of what promises to revolutionize the financial industry; cryptocurrencies. In October of 2008, Satoshi Nakamoto published the Bitcoin whitepaper.
According to Emin Gun Sirer, a computer science professor and blockchain researcher at Cornell University, there is a chance Satoshi was affected by the events that led to the ensuing financial meltdown.
Basil has three years of freelance experience writing on disruptive technologies. He focuses on breaking news and education pieces; helping to spread the gospel of Blockchain. He hopes to have his own blockchain company one day; helping the world through its innovative ledger technology