Merryn Somerset Webb doubts that markets will go on rising — and advises us how not to get poorer in 2010
Back in early 2007, an interviewer challenged my stance on the housing market. She pointed out that I had been bearish on the property market for several years but that the market did not seem much interested in my opinion. It wasn’t crashing. And that, she said, suggested that it never would.
This is a pretty dimwitted argument. But it is much used when an asset class is rising for reasons connected to something other than its real value — its very rising is somehow used to justify its rise. Property market-watchers will remember that pre-crash, the most the housing bulls would accept was that there might be a ‘period of consolidation’ while incomes somehow — no one explained how — caught up with prices. And so it is in the stock market today. The market is rising because it’s rising and its fans are expecting a ‘period of consolidation’. By this they mean that the market might, just might, have got a tiny bit ahead of itself and will be flattish for a while until reality catches up with valuations. This is a tempting idea, just as it was at the height of the property bubble. But it comes with a problem: it practically never happens.
There is a general consensus that long-term equity market returns are around 7 per cent a year, inflation-adjusted, and there is therefore also an expectation that markets will see single-digit positive returns more often than not. Not so. In fact, years that produce returns of between zero and 10 per cent are the exception rather than the norm. There have been only 19 of them in the US since 1900: in all the other years, the stock market either lost investors’ money or returned them more than 10 per cent.
Chuck in today’s utter lack of normality — the global recession from which we may or may not be emerging, the almost unimaginable levels of fiscal stimulus to which our economies have been treated, the quantitative easing experiment whose ultimate economic impact remains a matter of guesswork — and it’s hard to foresee flat markets for 2010. Instead we should probably expect markets to move dramatically. The question, simply, is in which direction.
I’m guessing (these days everything is a guess) downwards. Why? Because given the state of the world and the difficulties most firms will face in trying to grow their profits next year, stocks just aren’t cheap. 2009 has been all about relief: investors bought stocks mainly because it looked as though the financial world wasn’t going to end after all. But it’s hard to see what we will find to be relieved about next year. Take the employment numbers from the United States in the first week of December. The market was pleased with them: the overall rate of unemployment ticked down from 10.2 per cent to 10 per cent. But 10 per cent is a shockingly high rate of unemployment. Look behind the headline number and the statistics are horrible. The number of long-term unemployed rose by 300,000, while around 250,000 people became ‘discouraged’ and gave up looking for work altogether.
At the same time, it’s worth noting that the US housing market — the key to the health of the US consumer economy and banking system — may not have bottomed. There have been mutterings over the last few months about signs of improvement. But what if the apparent decline in the number of houses for sale is nothing to do with a pick-up in the market and everything to do with banks sitting on portfolios of foreclosed properties, too nervous to sell at market prices? I’ve written elsewhere that if I had a moment to spare I’d head for Florida to buy a house (not a very Spectator-like admission, I know: I love Florida). But just because houses there look cheap doesn’t mean they can’t get cheaper. Hugh Hendry of Eclectica Asset Management, just back from looking at this prospect for himself, tells me that with ‘nondescript condos’ in Miami yielding a mere 3 per cent, there has got to be further to go. Feeling relieved? Me neither.
The fact is that this isn’t an environment in which the US consumer is likely to start spending. And if the US isn’t spending, Asia isn’t selling — which suggests the huge rallies in Asian markets could do with a correction too.
And so to the UK. Whatever the Chancellor expects for this quarter’s outcome, it still feels like we’re in recession. We have budget deficits and national debts that would make the Japanese blush. We have tax rises ahead, whoever is in power. And in our housing market (as Richard Northedge explained here last week) we’re still the proud owners of one of the few global bubbles that has not properly burst. Add all this up, and my — admittedly cloudy — crystal ball is showing more disappointment than relief into 2010.
So what can you do to stop yourself getting poorer in 2010? Tricky one. It isn’t a given that markets will react to the fundamentals in the way we think they should: if the last 20 years has taught us anything, it is that they very often don’t. So being out of the market isn’t easy to justify — and that’s particularly the case when interest rates are so low and returns on cash so feeble. With that in mind, investors would be wise to hedge a little by keeping money in steadily defensive investment trusts such as Personal Assets Trust and the Edinburgh Investment Trust.
Otherwise, there is always — as Christopher Fildes points out in this issue — gold. Everyone’s most wanted Christmas present this year is a nice shiny Krugerrand of their own. I’ve been a gold bug since 2000 so it makes me uncomfortable to see so many others coming on board now the price is around $1,125 an ounce, and was over $1200 in early December. Contrarian investments are more reassuring when they are genuinely contrarian.
Still, gold isn’t exactly a mass-market investment yet. Long-only fund managers might be moving into gold or gold stocks, but so far we’re only talking about the clever ones: Sebastian Lyon at Troy, who also runs the Personal Assets Trust which, pleasingly, is stacked with gold; Angus Tulloch at First State; and Gordon Elvey at JO Hambro, to name but three.
We read an increasing number of articles in the weekend press about how to buy gold; but, aside from a few long-term gold bugs, who really does have their own Krugerrands under the bed? If a gold mania takes hold — and all the signs are that it will — it won’t be over until the financial advisers to Premiership footballers have finished licking the wounds left by the implosion of Dubai’s super-luxury villa market and started buying Prada-branded gold bars for their clients. That’s probably still a couple of Christmases away.
Merryn Somerset Webb is editor-in-chief of MoneyWeek and a columnist for the Financial Times.