Tom Stevenson, Fidelity International, 3 Oct 2022
For pretty much all of my working life, we have been able to hold onto a handful of truisms about investment. Expressions like ‘time in the market not timing the market’ become investment adages because their truth endures through the ups and downs of the cycle.
But sometimes, as Jim Callaghan noted about politics in the 1970s, there is a sea change about which we can do nothing, and which is only really clear in hindsight. In investment the most famous of these may have been the start of the so-called ‘cult of the equity’ in 1956 when George Ross Goobey, the manager of the Imperial Tobacco pension fund, made the then radical claim that shares offered better inflation- and risk-adjusted returns than bonds.
He was right and the rest is market history.
Looking for the equivalent sacred cows today, I was unsettled to discover just how many things I could list about investing that I used to believe unreservedly and about which I’m now not quite so sure.
First on my list is the foundational belief that dividing your portfolio between shares and bonds will always smooth your investment journey, ironing out the peaks and troughs and helping you sleep better at night. This year has been a shocking reminder that in certain circumstances (think high inflation and central banks prepared to risk recession to get it under control) both bonds and shares can perform extremely badly at the same time. The last nine months or so have tested to destruction the reassuring idea that when one of these two asset classes falls the other tends to rise. Risk averse investors who have sought the shelter of a traditional balanced fund are quite reasonably asking their advisers what has just hit them.
The next myth recent events have skewered is that gold is a hedge against inflation. This illusion gained traction in the 1970s when the precious metal performed well alongside sharply rising prices but there is more correlation than causality at work here. The truth is that gold performs well when inflation is higher than interest rates and bond yields. Then, the metal is forgiven its most glaring disadvantage, the fact that it does not pay an income.
Negative inflation-adjusted or real yields are the key to a rising gold price. These are often associated with periods of high inflation but not always. Today’s rapid swing from negative to positive real yields and the associated underperformance of gold this year make the point.
The third truism is a more recent arrival in the conventional wisdom and this year’s reversal of it might be seen as a return to a more durable fact of investment. The cult of growth, most obviously the outperformance of technology shares in recent years, has run into the sand as rising interest rates have changed the arithmetic of discounted cash flow models that put a high value on future earnings. Investors are once again looking for the bird in the hand that less exciting but steady cash generators and dividend payers can offer. Twenty years ago, we were reminded by the dot.com crash that shares on low multiples of earnings or assets, or which paid a high and sustainable income, were worth more than the market often acknowledges. I suspect we are relearning that today.
A final investment truth that has dominated market thinking for years but has been undermined by recent events is that China will in due course be just like America but bigger. Beijing’s recent prioritisation of ‘common prosperity’ over economic growth confirms that China has long since given up slavishly following the western development model. Ten years ago, the relentless growth of the Chinese middle class and their journey through the acquisition of household goods and towards the consumption of leisure and financial services still looked like a one-way bet for investors. A property bubble, regulatory squeeze and Zero-Covid policy later, things look harder to navigate.
What does all this add up to? In some ways a more difficult backdrop than was in place during what we will come to see as a golden age for investors. But also, I hope, a period ahead in which there will be opportunities that have lain dormant for many years. There won’t be a shortage of ways to make money in the markets in future or to protect its value; we will just have to look for them in different places.