First, a credit downturn does not take place in a smooth line. Expect periods of micro-bullishness even when the general trend is moving downwards. This means timing the market will be difficult, as opportunities come and go quickly. Even when one knows which strategy to invest in, executing the plan will be difficult — if not impossible — given that most investors need to go through their internal investment committees.

Second, excessive leverage in the banking system is not a major issue today and thus the next crisis is highly unlikely to play out like 2008. Thanks to a prolonged period of low interest rates, borrowers have termed out their liabilities, keeping their interest expenses low and reducing or eliminating covenants. So companies won’t all default at once, and the cycle is likely to start with those borrowers where weak fundamentals meet excessive leverage. As such, we expect a shallow but prolonged period of draw-down rather than the V-shaped pattern we saw in 2008. Furthermore, rather than a 2008-style market-wide blackout, this time around we are likely to see specific industries suffer.

Today, much of the risk-taking has moved from the public to the private market, which has learned from 2008 and done a good job matching the liquidity of underlying assets to liabilities. Selling pressure — in timing and severity — will vary by lender and is likely to have idiosyncratic drivers. We should expect asset sales to be dominated by private, pre-negotiated bilateral or club deals rather than public auctions or b-wics.

Since 2008 is not going to be a good playbook for the next cycle turn, ‘buying the dip’ will be a poor investment strategy.