Interactive Investor is 21 years old. To celebrate, our top journalists and the great and the good of the City have written a series of articles discussing some of the changes in the investment world over the past 21 years, and what the future might hold for investors. Here’s the latest from Nick Train.
The FTSE All-Share index was first calculated in April 1962, with a maiden value of 100. At around 3650 as of mid September 2016, the capital value of the index alone has compounded at nearly 7 per cent a year over those 54 years, a return which takes no account of the additional rich flow of dividends paid by UK companies.
We can safely say that anyone who has expressed a pessimistic view about the long-term outlook for UK equities over most of that period has been just plain wrong.
A similar performance through to 2070 would lift the index to around 134000. Is that feasible?
WHAT'S GOING TO HAPPEN NEXT?
Well, one of my favourite quotes about the future comes from the historian Macaulay, writing in 1830: 'By what principle is it that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?' So why should it not be?
But you want to know what is going to happen next, not over the next 54 years. What I always say to that is that I expect UK equities to be much higher in 10 years' time.
My view is that price/earnings ratios will shoot up, as real earnings growth accelerates. I also think quoted companies' capital intensity will decline as digital assets replace physical ones.
That's the good news. But the less good news is that what will drive the market higher is the emergence of major new companies and even industries that you and I haven't heard of yet. That will make picking investment winners trickier.
I say this not as a futurologist making controversial guesses about a brave new world. I say it as a historian of markets. For 200 years or more, technology has been the 'Engine that Moves Markets', to borrow the title of Sandy Nairn's excellent book.
TECHNOLOGY DRIVES MARKET RETURNS
People try to predict the stock market by watching interest rates, GDP or even politics. But they're looking in the wrong places. It is technology behind the successive waves of stock market returns.
We're lucky to be alive during a period of extraordinary innovation, but don't forget that technology is always as busy destroying companies as it is creating them. That's confirmed by the bewildering flux in the constituents of the indices over time.
For instance, consider the outlook for the top 10 biggest members of the FTSE All-Share today. They consist of two banks (HSBC, Lloyds), a tobacco (British American Tobacco), two big oils (Royal Dutch Shell, BP), three drug companies (Glaxo, Astra and Reckitt, sort of), a telco (Vodafone), and a distiller (Diageo).
And you have to wonder. What will peer-to-peer lending, vaping, solar energy, gene sequencing, free telephony and - who knows - even the possible legalisation of marijuana do to these mega caps over the next decade?
We'll need regular shots of Johnnie Walker and, periodically, Gaviscon to calm our nerves through the coming changes.
Nick Train is manager of the Finsbury Growth & Income trust.
This article was first published in our special publication 21: Twenty-one years of Interactive Investor. Download your digital copy for free here.