Reuters: Scars of '08 Playing Psychological Role in Market Volatility

Jan 22 2016 | 7:30pm ET

By Carmel Crimmins (Reuters) - Psychological damage inflicted on investors during the 2007-08 financial crisis is helping drive dramatic moves in world markets and is likely to sustain volatility for years, bankers and fund managers said.

Stocks and oil, at the forefront of a global market rout since the turn of the year, rebounded strongly on Friday thanks to hints of more monetary policy support by the European Central Bank.

But the reprieve could be short-lived if renewed fears over the Chinese economy reignite alarm among retail investors still spooked by their experiences of the financial crisis, when banks bet their balance sheets on risky mortgages and trillions of dollars were spent bailing them out.

Ray Nolte, chief investment officer with hedge fund SkyBridge Capital, calls it "post financial stress syndrome".

"People are scared and I think they are still reacting to the bursting of the asset bubble that happened in 2008," Nolte told Reuters on the sidelines of the World Economic Forum, held every year in the Swiss alpine resort.

"That is something that we think can take 10-15 years to work through."

"I think you could have another couple of years of this type of volatility."

Fears a slowing Chinese economy will drag the rest of the world down with it have caused equity markets to fall sharply in the first three weeks of 2015.

"Goodwill got fully destroyed after the crisis and to rebuild that takes a long time," said Juerg Zeltner, the head of wealth management, at Swiss bank UBS.

"Sometimes I think to myself it takes a generation. Maybe it requires a new generation of people who believe that the system has learned and things have been rebalanced."

Central banks cut interest rates to record lows and flooded markets with money in the wake of the financial crisis and the prospect of those policies being reversed -- with the U.S. Federal Reserve raising rates for the first time in nearly a decade in December -- is a further destabilizing factor.

"That huge amount of money in the system...five times more dollars, two times more euros, three times more yen. To unwind that trade is going to take a long time, that is why I think it takes a generation," said Zeltner.

Geopolitical risk, falling oil prices and the health of the Chinese economy were all hot topics this week at Davos but for the most part, the investors and bankers in attendance described January's market rout as a correction rather than a crisis.

Nevertheless, many large institutional investors appear to be holding their nerve.

"Chief investment officers of big institutions have not been in risk-off mode," said Mark McCombe, head of BlackRock's institutional. "This is not '08 or '09 where institutional investors pulled out. Market volatility in 2016 has not been driven by large pools of institutional capital."

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