What now for the stock markets? Security in insecure times

Volatility in the stock markets and inflationary pressures are putting pressure on our spending, but as Peter McGahan explains the reasons for price hikes aren…
stock markets

World stock markets have again been crazy, and I’ve had a few calls to explain where we are. The news has a lot to answer for in creating fear and that toxic fear can assist in you losing more than just your head.

Moving into Brexit, or concerns about the pandemic, the headlines trashed markets, only for them to recover very quickly, whilst the inexperienced investor had moved their capital out and had to buy back in at a more expensive price. Noise is just noise, and the skill is having the steady hand at the tiller and being able to see through noisy data.

Consider the noise of Cineworld, the second largest cinema chain in the world’s share price. In April 2020, just about to go into lockdown, the price hit 36p. Less than two months later, it had rocketed to 92p (155 per cent) and by March 2021, deep into multi lockdowns and social distancing, its price hit 122p (238 per cent in 11 months). Where was the logic behind that?

Just over a month ago I wrote about all the historic headlines which would have had you lose your shirt by acting on such noise.

As always, looking at reliable data pays dividends. While Biden and others blame Russia for stock markets and inflation, that is simply not true.

The news cycle and stock markets

As Hans Gosling noted, that blame instinct focuses us on obsessing about finding a guilty party to punch, and once we have that, we stop looking elsewhere, undermining our ability to solve the complex problem. It’s a strategy. Biden’s “Putin’s price hike’ statement is just being repeated over and over on the basis it will become true. It isn’t true. Inflation was well on track before then and just nudged along by the war.

The winners have been oil and commodities with the commodity index up over 60 per cent year to date, and of course value stocks, which we mentioned in this column over a year ago as a hedge to inflation. Indeed, the MSCI UK index is also one of very few markets producing a positive return, largely because it has a 52 per cent weighting in good old value stocks as opposed to the US which is closer to 25 per cent, hence its underperformance.

Attractive markets

In the leadup to the referendum, the UK’s stock market was trading above its average versus the rest of the world stock market excluding the UK’s market. It has traded significantly below that level ever since, and trades at a large discount. It is therefore by default, a more attractive market for investors.

This is coming off the worst GDP decline in 2020 of 10 per cent, last witnessed in the great frost of 1709, which I’m sure you will all remember.

Despite the doom merchants, certain facts remain. As you can see, oil companies are not the only companies making a tidy sum out of us, such is their pricing power, and that pricing power reflects in their one year forward pricing earnings per share. The graph showing the global index of equities alongside earnings per share shows the lines are virtually correlated until this year when the index nosedived yet the earnings per share has bolted onwards and upwards. That’s why corporations are at record profit margins globally.

Inflation in advanced economies is forecasted to come back to around 3.1per cent in 2023 and real growth in the economy is forecasted to hit 3.6 per cent for 2022 and 2023.

Where are the wins?

As we said in this column over the last couple of years value stocks perform better in inflationary environments. People need the stuff and services they have. Growth stocks are very sensitive to interest rates, which are moving north.

A further hedge (protection against downsides) is gold. Looking back over the last 50 years, a portfolio with a 60/40 equities and bonds would produce a return of 9.7 per cent per year. If, however, you diversified just 10 per cent to have a 55/35 equity bond split and a 10 per cent gold holding, the return increases to 9.8 per cent with a significant reduction in volatility.

And so, you have better returns with less risk. Happy days.

Not all funds are actively managed like the above so keep on top of them.

You can contact Peter if you have a query about the content of this column or would like your investments reviewed, call 01872 222422, email [email protected] or visit wwfp.net.

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Tags: Last modified: June 29, 2022

Written by 10:27 am Savings & Investments, Finance, News & Views