Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The ice hockey star Wayne Gretzky famously said: ‘I skate to where the puck is going, not where it has been.’ His advice was repeated by Warren Buffett who understood that it applied just as much to investment.
He was right. Stock markets look to the future. They don’t care much what’s in the news today because investors have already priced that in. What matters is what the news is going to be tomorrow.
We don’t know that, of course. That is why we are not all sunning ourselves on tropical islands. But it is the investor’s challenge to try and work out where the economic and corporate earnings pucks are heading. Alternatively, we can accept that it’s an impossible task and be so well diversified that it no longer matters.
I was reminded of this today by an interesting observation in the FT that European shares have been the best performers among major markets since the start of the year. Depending on the index you look at they are pretty much neck and neck with the US, but even that is quite an achievement when you look at the news-flow coming out of the region.
The MSCI Europe index is up just over 10% during the past three months, a bit better than the S&P 500 and better than the FTSE 100, which has had a good start to the year too, up 8%. By contrast emerging markets and Japan are roughly where they were in February. Please remember past performance is not a reliable indicator of future returns.
It is not so long ago (less than a month) that Europe confirmed its second recession in a little over a year. GDP shrank in both the final three months of 2020 and the first quarter of this year. Despite the winter lockdown, investors were, however, already looking forward to a sharp improvement in the regional economy. They were skating towards where the puck was going.
One of the key drivers of European stock markets this year has been their low starting valuation. Europe’s shares have been out of favour for years, since the sovereign debt problems that followed the financial crisis from around 2010. The region’s markets moved sideways for ten years or so but have taken off over the past year as hopes have risen that recovery from the pandemic, while delayed, will be robust.
The data is starting to confirm that. Recent purchasing managers index readings showed the fastest growth in new orders for 15 years. And company profits are expected to follow suit, up more than 40% in 2021, according to FactSet, compared with 33% in America.
This good news has not been priced into markets to the same degree that recovery in the US already has. Shares are priced at about two-thirds the multiple of earnings that investors are prepared to pay to invest in American companies.
Europe actually offers investors a double whammy. If demand rises in the region that is the icing on the cake for a region that is already exposed to growth in the global economy through its strong export sector.
But the key lesson to take from all this is that it is difficult to anticipate when, and to what extent, stock markets will start to factor in uncertain future developments. It is even harder, from a psychological point of view, to get in ahead of other investors because that usually involves apparently disregarding what is going on at the time. You have to be a contrarian and few of us really are.
So, how can you get around these problems? By taking the emotion and the decision-making out of your investments. A good way to do this is by making sure that your portfolio is well-diversified, investing in markets that are not obviously doing well alongside those that seem to be.
When I look at the performance of the various geographical ‘pots’ within my pension, it can be tempting to wish I’d put more in the US, for example. That part of my portfolio has done much better in recent years than the UK, Europe and Japan.
But that is to miss the point. When I last tidied up my investments and allocated money across a wide range of regions, I did not know what the future held. And having a well-balanced portfolio has provided me with a relatively smooth ride.
The Select 50 list of our preferred funds groups our suggestions in eight categories. Two represent different asset classes - bonds and alternatives. The remaining six are based on geography: Global, US, UK, Europe, Asia Pacific and Emerging Markets, Japan.
You may not know where the puck is headed next. But if you put your investment eggs in a broad enough range of baskets, at least part of your investments will already be skating that way.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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