2015
Professor John Turner
Professor John Turner, Head of the Management School, has contributed to the most recent publication of the “Professional Investor”, the CFA Society’s quarterly magazine which delivers valuable insight on investment management and research practices and trends.
John’s article looks at how investors can learn from the past:
Financial history informs professional investors that they should attempt to understand the geopolitical environment they operate in - financial assets appear to perform well in tranquil geopolitical environments where there is a hegemonic power. It also teaches them that government macroeconomic policy can detrimentally affect asset returns – high inflation damages fixed income return.
Financial history can help professional investors successfully ride bubbles. There are at least three warning signs that a bubble could be underway. First, financial bubbles are usually accompanied by technological revolutions. Second, most historical bubbles have been fuelled by loose monetary policies and cheap credit. Third, financial bubbles are usually accompanied by increased participation rates, with new investors coming to the market.
Professional investors are aware of the consequences of banking crises for the wider economy and financial markets. John, in his book “Banking in Crisis: The Rise and Fall of British Banking Stability, 1800 to the Present” argues that banking systems in the past were stable whenever bankers were restrained from excessive risk taking. The absence of restrictions leaves banking systems vulnerable to lending booms, whereby banks increase their leverage and diminish their asset quality.
John concludes that while financial history cannot endow investors with trading strategies and cannot help them time markets, it does help them see that important determinants of asset returns are geopolitics and macroeconomics. Financial history also helps professional investors develop early warning systems that a bubble is underway or that a financial crisis is around the corner.