More regulation and government involvement looms

More global regulation, more government involvement and back-to-basics investing are some of the medium term implications of the global financial crisis, according to AMP Capital Investor’s head of investment strategy and chief economist, Dr Shane Oliver.

Oliver said the damage caused by the financial crisis would lead to a rise in regulatory oversight of the financial sector globally.

“This is already apparent, with various governments taking stakes in financial institutions.”

He said given the problems sophisticated investment products have had and the rise in investor scepticism, we may see a return to simpler investment products with less reliance on financial engineering, leverage or claims of positive returns in all environments.

“We may well see a back-to-basics world re-focused on shares, government bonds, cash and direct property/infrastructure, with less reliance on in-between assets,” Oliver said.

According to Oliver, the crisis, along with greater investor scepticism and more regulation, is likely to slow the rate of growth in the financial sector after 25 years of above average growth.

Meanwhile, the crisis is likely to have accelerated the shift in relative economic power from the G7 countries, which have now suffered a loss of global credibility and are likely to be hampered by excessive debt (especially in the case of the US), to Asia, which has high savings and has not seen its banking system come under threat. This will likely to be reflected in a favourable relative performance in Asian assets going forward.

Oliver said investors should be sceptical of financial engineering or hard to understand products, and should avoid too much gearing or gearing of the wrong sort. He also said investors should realise the importance of diversification and government bonds.

“While listed property and hedge funds have been seen as an alternative to stodgy low yielding government bonds, over the past year the former have both run into big trouble and been shown to be correlated to equities, whereas government bonds have been star performers.”