It’s an old adage in investment circles, but it remains true: investing is about time in the market, rather than timing the market.
There’s been a lot of talk about the FTSE 100 breaching the 8,000-point mark for the first time in its history. The market reached 7,877 on May 22, but has since fallen back – largely hovering between 7,500 and 7,700 points.
Could it really reach another all-time high? There’s certainly some momentum behind that point of view. Economic growth may be slowing, but it is growing nonetheless. Interest rates remain low and look unlikely to change soon. Takeover bids have boosted share prices and could continue to do so.
However, a few blips are appearing on the horizon.
Protectionism is returning, with trade wars dominating business headlines. Takeover bids also suggest we’re entering the latter stages of the economic cycle. Some analysts have pointed towards recession in the not-too-distant future and, if it were any sooner than 2020, the market would not be pleased.
That said, a fall in share prices needn’t necessarily follow. The market can still rise during a downturn, if businesses remain cash-generative and investors can see upside.
That’s why many of us are still bulls. There’s little point in depositing money in the bank, with institutions struggling to generate returns. And, with bond yields at similar lows, equities look like one of the only plausible options.
When an index approaches new highs, cries of inflated valuations tend to begin. In this instance, there’s an emerging consensus among fund managers that UK share prices look good value compared to the US and Europe.
There are several reasons for that. First is the spectre of Brexit, which has acted as a drag on stocks since the referendum. Although the price-earnings multiple on US shares has always been higher than in the UK, the gap has widened since Brexit. Strip out this discount and there is real upside potential in a range of shares.
In fact, the likely effect of Brexit on FTSE 100-listed companies has, to some degree, been overstated. When you consider that 70 per cent of the index’s earnings come from abroad, it is suitably diversified to mitigate any serious effects on the UK economy; albeit, particular companies could suffer.
Secondly, the UK doesn’t have as much of a stock ownership culture. In the US, more individuals have investments – more than half, according to some studies. You could also argue the stock market has greater cultural resonance, with more people taking an interest in its performance.
Third, US markets have traditionally been more driven by tech stocks, which often see investors pay more now for future earnings. Equally, listed US companies don’t tend to pay dividends to the same level as their UK counterparts, which have historically been put under pressure to do so by funds.
It was said to me early in my career that there’s always a reason not to buy into the market – whether it’s geo-political tensions, economic downturn, or fear we’ve already hit a peak.
But, if you listen to that, you’d never invest. Even if things don’t pan out exactly as you’d like, investors have to take the long-term view. It’s an old adage in investment circles, but it remains true: investing is about time in the market, rather than timing the market.
Alasdair Ronald is senior investment manager at Brewin Dolphin.
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