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.

This article first appeared in the Telegraph.

THERE are times when investing feels easy, like taking a long upwards escalator. You put your bags at your feet and enjoy the ride. You don’t even have to pay much attention; just standing there will get you to the top. Other times, it’s harder work. You have to climb the stairs, avoiding people coming down the other way. It’s tiring.

Since the second world war there have been three long periods in which investors have been carried effortlessly higher (OK, with the occasional jolt). The long post-war recovery period through most of the 1950s and 1960s. The 18 years from the recession of 1982 to the bursting of the dot.com bubble in 2000. And the period between the financial crisis and Covid.

The bits in between were more difficult to navigate. You could have made money in the inflationary 1970s and the first decade of the current century. But you would have needed to be on your toes, spotting market opportunities and knowing when to stand on the side-lines. In the first of these periods you would have had to work hard just to keep ahead of rising prices - a bit like running up the down escalator. Unfortunately, it looks like the next ten years might look a bit more like these two challenging decades than the smooth upward trajectories either side of them.

According to Peter Oppenheimer at Goldman Sachs, who has analysed this 75-year period and taken a stab at guessing what comes next, these three bull markets shared some key attributes. They all started from a point of very low valuations, when investors’ optimism had been knocked by war, recession or crisis, and profits were rising from a low base. Interest rates were low or falling. They were periods in which economic growth, technological change, regulatory reforms, or a combination of these made shares look attractive compared to other investments.

With the V-shaped market recovery during the pandemic putting the post-2008 bull market back on track, you may not be surprised to hear that not many of these factors are currently in place. Indeed, in most cases the opposite is now true. Valuations are higher, profit margins likewise, and interest rates are on the turn.

Valuations are not a good predictor of returns in the short-term but over longer periods of ten years or more they are a reliable guide. Whether you look at the price of shares compared with earnings or at the total value of shares compared with economic output, markets are towards the top end of their historical range.

As for profit margins, it is conceivable that new technologies and the ongoing move towards less capital-intensive businesses could keep pushing the return on sales higher. But margins have trebled over the past 30 years from 4% to 12% on the back of an unusually favourable cocktail of tax, regulation and labour market trends. It seems implausible that this can carry on indefinitely.

When it comes to interest rates, the timing and pace of change is uncertain, but the direction of travel is clear. This week’s upward shift in bond yields had the look of a lightbulb moment. The combination of financial, geopolitical and demographic changes that dragged the cost of capital lower over the past 40 years cannot be repeated. The tailwind provided by falling rates will be absent.

Oppenheimer’s conclusion is that returns will be lower than they have been and making money will be about picking individual investments rather than catching the wave of the in-vogue investment style (big growth shares most recently) or geography (the US).

The outperformance of these two has been the most dramatic feature of financial markets in the post-financial crisis period and it has been entirely rational. Falling bond yields have made long-term growth stories like technology stocks more valuable to investors than companies in less favoured industries. And even in the short term they have delivered much stronger profits, notably during the pandemic. Tech-heavy markets like the US have inevitably done better than those weighted to more cyclical industries like the UK, Europe and Japan.

For two reasons, this may change. First, while US earnings grew by around 6% a year between the financial crisis and Covid, those in Europe essentially stagnated over the same period. Looking forward, growth in America is likely to continue to be higher but by a much narrower margin as Europe’s cyclical industries face fewer headwinds and the region’s markets become more technology focused. Second, stock markets outside the US enjoy a significant valuation advantage. They can start to catch up.

So, we should prepare for lower returns and get ready to look for stock-picking opportunities within that flatter market. However, the effort is likely to be worth it. There’s one final reason to stick with shares through the more challenging period ahead. Compared to the principal alternative investment, bonds, shares look likely to perform relatively well.

In recent years, investors were happy to accept an ever-lower yield from bonds because they became increasingly relaxed about the threat to their capital posed by inflation. On the other hand, less growth and, especially, less predictable growth meant they continued to insist on a relatively high dividend yield from shares. At the last valuation peak for shares in 2000, investors would accept a 1% yield from the most popular shares even when they could pick up 6.5%, risk-free, from government bonds. Today both shares and bonds yield around the same. If you factor in buybacks, shares have a significant yield advantage.

Looking ahead, the stock market may feel less like a rising escalator than one of those horizontal airport travelators. You will have to do some of the work yourself, but it should still be carrying you forwards.

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. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. 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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