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 good reasons not to try to time the market. The most important is that it is impossible to do it consistently well. As they say, no-one rings a bell at the top or bottom. To get in or out at precisely the right time requires a contrarian mindset which few of us possess and a crystal ball which none of us does.
Because of this, you will generally hear people like me say things like ‘time in the market is more important than timing the market’. This is sensible guidance from the practical perspective of managing your investments but factually it’s not really true. Spotting the big shifts in markets, if you can do it, makes all the difference.
As an example, consider the long-term performance of the S&P 500 value index and that of its growth counterpart. The former measures the performance of the companies in the US benchmark exhibiting the best value, defined as a low price compared with earnings, sales and book value. The latter does the same for the companies with the highest growth in sales and earnings and price momentum.
Growth and value investing sit either side of a schism in the world of investment. A Swiftian divide as bitter as the disagreement between those in Gulliver’s Travels who favoured cutting into their eggs via the Big End and those who preferred the Little End. How well you have read just a couple of shifts in that stylistic divide over the past 25 or so years will have made a huge difference to how successful you have been with your investments over that period.
There have been two watershed moments for growth- and value-focused investors since the mid-1990s. Between 1995 and 2000, the growth style prevailed; from the bursting of the dot.com bubble until the aftermath of the financial crisis in 2009, value was the place to be; since then it’s all been about growth. Winning two out of the three legs of the race, it is unsurprising that growth has beaten value overall by a wide margin over the whole stretch.
If you had invested £100 in the growth index in 1995, you would have £1,140 today. The same amount in the value index would have risen to just £500. However, if you had timed the shifts in 2000 and 2009 to perfection, riding growth then value and then growth again, you would have turned your £100 into almost £1,500. The worst combination - value, then growth, then value - would have left you with just £382. Please remember past performance is not a reliable indicator of future returns.
One other comparison makes a similar point about how a handful of good decisions can transform your fortunes as an investor. If you had invested £100 in the technology-heavy Nasdaq index 10 years ago, it would be worth £500 today. The same amount invested in our domestic FTSE 100 index would have grown to just £108. Being in the right place at the right time is at least as important as picking the right stocks.
Why does this matter today? Because there is a growing sense that a combination of factors has brought us to one of these infrequent but crucial turning points in financial markets. We may well be at one of those junctures where we need to forget the conventional wisdom of the past few years and adopt a totally different mindset. This is harder than it sounds. To believe that we are on the cusp of a new reflationary era in which real assets like industrial metals and cyclical industrial stocks and financials will outperform the consumer staples and technology giants that have ruled the roost for so long is a big cognitive challenge.
So, what is the case for this new world? Here are three possible reasons.
The first is a shift from digitisation to de-carbonisation as the principal economic impulse. Over the past 20 years or so we have seen a deflationary substitution of labour by technology. Effecting that change has been capital-light and favoured growth over value in stock market terms. Looking forward to the green revolution to come, it is likely to be much more capital- and labour-intensive. The recommitment of the US to the Paris climate accord and China’s determination to be net-zero by 2060 will require enormous investment in clean energy infrastructure. Decarbonisation, unlike digitisation, is intrinsically inflationary.
If this is not enough to fuel a renewed commodity super-cycle by itself, then it almost certainly will be when combined with years of underinvestment in productive capacity by the world’s miners and a post-pandemic unleashing of pent-up demand. For a guide to what this might look like, you need to go back not to the mini-commodity boom of the noughties but the explosive growth in the price of real assets in the inflationary 1970s.
The third reason to expect an inflation-driven watershed in market leadership is the apparent abandonment of fiscal prudence in favour of full employment and social safety nets. The Keynesian consensus is back in the driving seat thanks to Biden’s blue wave and Johnson’s red wall. The 2009-2020 cycle was inflationary in financial markets but disinflationary in the real economy. The next phase will be the reverse.
What does this look like from an investment perspective? It suggests equities outpace bonds; commodities run ahead of financial assets; emerging markets beat the developed world; value recovers lost ground versus growth; cyclicals take the lead over defensives; income today trumps the hope of growth in the future. All of these shifts are major reversals of what we have taken for granted for more than a decade. No doubt it will all look obvious with the benefit of hindsight.
Five year performance
Past performance is not a reliable indicator of future returns
Source: Refinitiv, total returns as at 5.2.21.
Important information: 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. 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 an authorised financial adviser.