Comparison of investment in asset classes and methodology
Given the current COVID 19 pandemic, it is useful to compare how different asset classes fared in the past. Although past yields are not an indication for future returns, they can still be food for thought during these challenging times.
As comprehensive data is available for the 2007-2009 period, we shall examine the subprime crisis with regards to the collapse of the Lehman Brothers Bank.
We will use three reference points in our comparison:
a week before the collapse of the bank, Sept. 8th 2008
a year after, namely Sept 8th 2009 or the full-blow up of the crisis
10 years after the crisis Sept. 8th 2018
We shall use various indices such as the gold price, the oil price, the square meter price of residential real estate in Berlin and an all-German real estate index.
Stock indices
To employ the correct methodology, we have chosen to use stock indices rather than single stocks as a comparative evaluation.
To have an objective platform of comparison we intend to use four stock indices (DAX, Dow Jones, Hang Seng, FTSE 100) from three continents. This is to allow for geographical diversification.
The below shown Dax chart is an example of the stock indices.
Chart 1: Value of the Dax from 01/01/2006 to 01/01/2019 [1]
Table 1 then shows the four indices for the three key dates, the change to the key date on September 8, 2008, is given in brackets after the value, with the starting value being 100.
DAX [1]
Dow Jones [5]
FTSE 100 [6]
Hang Seng [7]
Sep 8, 2008
6,263.74 (100)
11,510.74 (100)
5,446.30 (100)
20,794.27 (100)
Sep 8, 2009
5,481.73 (-12%)
9,497.34 (-17%)
4,947.30 (-9%)
21,069.81 (+1%)
Sep 8, 2018
11,959.82 (+91%)
25,916.54 (+125%)
7,277.70 (+34%)
26,973.47 (+30%)
Table 1
Table 1 quite clearly shows that all the examined indexes fell sharply at peak times or only gained slightly. The Hang Seng performed a bit better. The crisis hit less in the Far East. China, in particular, was able to cushion many negative effects through massive investments. This positively impacted Hong Kong as well. 10 years after the crisis the Dow Jones and the DAX, in particular, had a massive increase on profits of up to 125%.
Gold
Investing in gold has always been considered one of the safest investment options during crisis management. During 2008-2010, again, gold has risen sharply. This continued until 2012, see Table 2 and Chart 2.
Chart 2 – Gold price per oz from January 1, 2006 to April 1, 2020 [2]
The gold price rose over 25% until September 2009. This trend continued until 2012 when the gold price peaked at over USD 1,750, it basically more than doubled.
Gold price per oz
Sep 8, 2008
USD 797.50 (100)
Sep 8, 2009
USD 997.90 (+25%)
Sep 8, 2018
USD 1,193.60 (+50%)
Table 2
Oil
The oil price is another crucial parameter as well as being an excellent measuring instrument on how the economy is fairing. Falling gross production usually means a decrease in oil price due to lower consumption. The WTI (West Texas Intermediate) is used as the standard. Given the bleak economic perspectives, a decrease in oil price can be expected during a crisis, see Table 3.
Oil price
Sep 8, 2008
USD 106.34 (100)
Sep 8, 2009
USD 71.10 (-33%)
Sep 8, 2018
USD 67.75 (-36%)
Table 3. Oil price according to WTI standard per barrel 159 l [3]
The price of oil falls sharply during the peak of the crisis, it loses more than 30% and even 10 years later it is still 36% below the 2008 levels.
Real estate prices
Finally, the values for residential real estate in Berlin and the vdp- total real estate price index for commercial and residential properties are used as a reference.
From 2001 to 2007, the average price per square meter on the Berlin housing market ranged from 1,068 € / m² to 1,231 € / m² [4]. The market was pretty stable with little volatility at that time. Since 2009, this rate increases continuously, which can be derived from the data in Table 4. Please note that there are only annual values for both indices and no monthly values.
Price per square meter
2008
€ 1,096 (100)
2009
€ 1,202 (+10%)
2010
€ 1,255 (+15%)
2018
€ 4,200 (+283%)
Table 4. Average square meter price € / m² for residential property in Berlin [4]
The vdp- total property price index is published by the Association of German Pfandbrief Banks. This index compares the pure price change of real estate. To calculate the quality differences of the individual properties and to obtain a pure index, factors such as rental income, macro location, purchase price, year of construction and many other variables are calculated using a normalization process [9]. The index is made up of 75% of the price for residential property and 25% of the price for commercial property. Table 5 then shows the overall German overview of property prices. The impact of the crisis can clearly be seen in contrast to the Berlin real estate market.
Vdp – total property price index
2008
100 (100)
2009
98.1 (-2%)
2010
98.6 (-1%)
2018
147.3 (+47%)
Tabelle 5 [8]
An upward trend in prices can be observed in the Berlin real estate market. Whereas the rest of Germany shows a slight dent during the crisis. It is clearly visible that the real estate market is less vulnerable to economic fluctuations in comparison to the other observed investment options. Other factors that only affect the regional or German housing market have a significant impact. Berlin has been one of the most sought-after international real estate markets in the past 10 years.
Conclusion
The result shows that all asset classes except oil have recovered 10 years after the market turmoil of the 2008 subprime crisis. The recoveries varied considerably among the individual asset classes. Stock markets with high volatility such as the DAX or Dow Jones clearly outperformed the less volatile markets such as gold or German real estate. The real estate market in Berlin is the clear winner of the comparison. This excellent performance is due to the progressive internationalisation of real estate investments in the capital.
The great advantage of real estate investments over competing investments is the possible leverage with cheap loans which significantly increase the return on equity. This advantage over other asset classes is usually only given for institutional investors.
It should be noted that the capital growth was not included in the rent in both property indexes. With an annual rental yield of 3% for good locations for the years 2008-2018 [10], there would be an additional 38% capital increase.
DAX
Dow Jones
FTSE 100
Hang Seng
Gold price
Oil price
Berlin RE rice sqm1
vdp-index2
Sep 8, 2008
6,263.74 (100)
11,510.74 (100)
5,446.30 (100)
20,794.27 (100)
$797.50 (100)
$106.34 (100)
€1,096 (100)
100 (100)
Sep 8, 2009
5,481.73 (-12%)
9,497.34 (-17%)
4,947.30 (-9%)
21,069.81 (+1%)
$997.90 (+25%)
$71.10 (-33%)
€1,202 (+10%)
98.1 (-2%)
Sep 8, 2018
11,959.82 (+91%)
25,916.54 (+125%)
7,277.70 (+34%)
26,973.47 (+30%)
$1,193.60 (+50%)
$67.75 (-36%)
€4,200 (+283%)
147.3 (+47%)
Table 6
1 Annual average 2 Only given annually
The currently known measures to remedy the economic effects of the COVID 19 pandemic are very similar to the measures taken in the subprime crisis. Ultimately, the level of central banks’ expansive monetary policy worldwide is likely to be significantly higher than the level of the subprime crisis. The likelihood this time, too, is that the rapidly expanding money supply will be reflected in an increase in asset prices over the years. The stock markets have already made up a large part of the price losses. It will be exciting to see which will be the winner in 10 years time!
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