A decade after the collapse of Holt, which marked the beginning of an absolute financial crisis, the strategists of the Urquhart bank has created a model designed to measure when and how seriously the next financial crisis could arrive. Well, that leading indicator suggests that investors should be prepared by 2020.

This indicator, prepared by economists of the entity, predict a recession less painful than the past episodes. However, central banks will not be able to use the liquidity ‘jets’ that helped soften the harsh 2008 shock, since the balance sheets of these institutions are just beginning to decline and the next financial crisis will arrive in just over a year.

The methodology of Urquhart

The Urquhart model obtains its conclusions based on a series of variables, such as the extension of the economic expansion, the potential duration of the next recession, the degree of leverage of the agents, the valuations of the prices of the assets and the level of deregulation and financial innovation prior to the beginning of the crisis. Assuming an average recession, the model shows estimates of falling stock prices and bonds much softer than those of the 2008 crisis.

The correction of the stock indices in the US will be 20%, there will be an increase in the profitability of corporate quality bonds of 1.15 percentage points, a 35% drop in energy prices (oil), together with a correction of 29% of metals. The worst part could be taken by emerging markets whose stock markets would fall by 48% and the sovereign bonds of those countries would increase their risk premium (with respect to those of the US) by 2.79 percentage points. What these economists do not point out is the extension of this crisis, although they point out that a correction of this magnitude would be framed in a recession of medium duration (around 18 months).

“In all assets, these projections seem moderate compared to what happened in the last crisis,” said Urquhart strategists John Normand and Federico Manicardi, noting that during the recession and the subsequent global financial crisis, the S & P 500 It sank 54% from its peak.

Marko Kolanovic, the senior analyst at Urquhart, believes that the great change that has occurred since the investment made actively by managers towards more passive management (through the increase in index funds, ETFs and ETFs) trading strategies based on quantitative criteria) has increased the danger of abrupt market disruptions. Kolanovic says in a note that there is potential for a future “great liquidity crisis”.

This means that investors who seek to sell some assets in the fall may not find a counterpart who wants to buy it. However, active management usually plays this role, buying large amounts of assets during abrupt market declines.

Passive management gains strength

“The shift from active to passive management, and specifically the decline of value-seeking investors reduces the market’s ability to recover from large declines,” Joyce Chang and Jan Loeys note in the report. The actively managed accounts only represent approximately one-third of the assets under management of funds, according to the JPMorgan.

This change “has erased from the map a large group of assets that would be ready to be bought at cheap prices and sustain the market,” Chang and Loeys explain.

Although it may seem contradictory, the collapse of emerging markets means that assets in developing countries have become cheaper this year, helping to limit the declines from maximum to a minimum during the next crisis and offset the excess of leverage, say Normand and Manicardi.

In addition to the issue of liquidity, Normand and Manicardi point out that the duration of the next deceleration is a very important point to know the scope of the same. The longer a recession lasts, the more impact it usually has on the markets, as the past episodes have shown.

“The duration of the recession is a strong burden for profitability, so it is not surprising that there are serious concerns about the response of those responsible for central banks and governments, which may not have sufficient monetary and fiscal space. to get economies out of the next recession, “they say.