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2008 Financial Crisis

This Review looks at the performance of the global economy and markets in 2008 and implications for the health sector.

In 2008, the invisible hand ruled the economy and markets with an iron fist. It was a classic boom-to-bust cycle.

Economic growth and prices seemed to defy gravity during the first half of the year. Then they had trouble finding the floor in the second half as global consumer demand dried up and investors fled the bear market in a way not witnessed since the Great Depression.

Global Recession

Three factors pushed the global economy into recession in 2008:


  • Continuation of global credit crisis;
  • Collapse in equity markets; and
  • Significant drop in consumer demand.


Before the sub-prime debacle, the global economy had been expanding vigorously, with growth running above 5 percent in the first half of 2007. Now world growth is estimated to have slowed from 5 percent in 2007 to 3¾ percent in 2008, with the downturn led by advanced economies.

This is the major annual contraction in advanced economies during the postwar period, broadly comparable in magnitude to those that occurred in 1975 and 1982.

There is now broad agreement that most advanced economies have fallen into recession, and activity in emerging economies slowed down abruptly.

There was little sign of a fundamental reversal of the financial crisis in the last quarter of 2008 despite the adoption of bold and comprehensive policy measures by many major advanced economies.

Markets in Distress 

By October and November, the Vix (Wall Street’s fear gauge) had soared to 80 compared with 23 at the beginning of 2008 and 16 during the May equities rally.

Equity volatility soared to record levels. After reaching all time highs, markets collapsed wrecking havoc on Wall Street and throughout the world. By the end of the year, anything remotely risky was shunned (equities, corporate bonds, commodities and emerging markets).

The Dow Jones Industrial Average and the Standard & Poor (S&P) 500 – two of the world’s most recognized equity benchmark indexes experienced an annual declined that close to that seen in 1931 and 1937.

The Dow fell 33.8 percent in 2008 compared with the 52.7 percent decline in 1932 and 32.8 percent in 1937. The S&P 500 dropped by 38.5 percent compared with 38.5 and 38.6 percent in 1932 and 1937 respectively.

The worst performing equity market was in Iceland. It dropped by 95 percent. The MSCI World Index of 23 developed countries fell by a record 42.1 percent in 2008, highlighting.

After a record high of investor inflows to mutual funds in 2007, investors pulled a record US$320 billion out in 2008.

Overall, however, equity was not seen as being safe. Equity funds had outflows of US$233.5 billion by December 29, 2008, with bond funds and balanced funds outflows of US$58.2 billion and US$28 billion respectively.

Government bonds and cash become the only safe havens for investors.

Disregarding yield in favor of safety, many investors simply sought safety and a return of rather than return on capital. The bond market boomed but with low returns. At times treasury bills even turned negative.

But most of the cash that was withdrawn went into money market funds which saw inflows of US$422 billion during 2008, reaching a record asset level of US$3.7 trillion despite the near zero interest rates paid on deposits.

Emerging Markets

In developing economies, the best performing market in 2008 was Ghana which climbed by 39 percent.

But overall, emerging markets did not fare well. The MSCI Emerging Markets (EM) Index experienced a drop of 54.5 percent in dollar terms. Weak demand from US, Japan and Europe contributed to the emerging market rout, led by a collapse in commodity prices which fell from records levels.

Fairly well behaved countries such as Brazil, Colombia, Mexico, Peru, South Africa and Turkey have essentially lost access to external finance.

Other states such as Russia, Iran and Venezuela suffered from a dual collapse in the price of their oil exports and the value of their sovereign bonds.

At the end of 2008, widespread paralysis affecting money markets and inter-bank lending had turned the US credit crunch and economic downturn into a global crisis that affected developing markets as well.


With a few notable exceptions, most sectors performed poorly in 2008.


There was nowhere to hide. No industrial sector or few market segments were spared.

Commodity markets recorded their worst ever annual performance with the S&P GSCI Index dropping by 46.5 percent.

The bull market for commodities, which had lasted for six years, collapsed in spite of new price heights for crude oil, petrol, gold, platinum, copper, aluminum, tin, led, corn, wheat and soybeans.

The price of crude oil collapsed after a stellar rise of the Nymex West Texas Intermediate (WTI) to US$147.27 a barrel. Base metals such as copper and aluminum dropped by 54 and 36.1 percent respectively.

The combination of continued stress in the equity markets and geo-political tension helped push gold to a record high of US$1,030.80 in mid-March and closing the year up 5.4 percent at above US$850.

Other rare bright spots included sugar and cocoa prices which rose by 9 and 70.8 percent respectively to hit a 23-year peak were rare.


Despite the credit-market woes, equities led by the high-tech industry did well in 2008. Pharmaceuticals and biotech stocks did well in 2008, outperforming the S&P 500. Health care and medical supplies did less well.

There are 10 sub-industry indexes in the S&P Health Care Index (12.2% of the S&P 500 index), with Pharmaceuticals being the largest at 53.4% of the sector's market value. The Health Care Index was in a long-term uptrend until 2007 when it started drifting sideways.

In 2008, the market-weighted Health Care Index registered a 5 percent gain compared with a 5.8 percent gain in 2006. Although, the Index has traced out a lower high than in the past, it has not registered a lower low.

During the same time, the S&P 500 Index did poorly, gaining only *** percent in 2008 compared with its 1.6 percent gain in 2007.

As a result, although the Health Care Index remains in a long-term downtrend, it broke out to the upside of the S&P 500 Index during 2008 because of the weaker relative strength of the latter.

This out-performance by the Health Care Index compared with the S&P 500 Index had more to do with the defensive characteristics of the health care industry where prices have not dropped as much as the overall market.

Towards the end of the year, prices were sitting between the 17-week and 43-week exponential. The weekly momentum, which was neutral towards the end of the year, did not give any clues about the future direction of the sector.

Upcoming Reviews of Healthcare 2008


  • Health and Disease Burden
  • Health Care Equity Funds
  • Health Insurance and HMOs
  • Pharm, Biotec and Medical Equipment
  • Hospitals and Ambulatory Care
  • Diagnostics and IT
  • Policy and Management
  • Health Education



Contact details

Alexander S. Preker

Health Investment & Financing
14 Wall Street, 20th Floor
New York, NY
United States of America

Office: 1 (212) 348-1866
Cell: 1 (202) 667-8286
Fax: 1 (212) 348-2866

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  January 01, 2009