There was much to concern investors in the first two months of 2016. Chinese growth has slowed further, and the renminbi devaluation has kept investors nervous that there is a more intense currency war ahead. Commodity prices have remained under pressure, with oil prices hitting the lowest levels since 2003.
Closer to home, investors have fretted over the ability of European banks to pay interest on bonds issued to shore up their capital, so-called CoCo bonds. Global manufacturing appears to be in a recession. And investors have not been overly impressed by central bankers’ growing enthusiasm for negative interest rates.
During the past year, since the last Isa season ended (on 5 April), positive returns from stocks have been hard to come by. Only two of 23 developed equity markets have made gains – New Zealand and Denmark. We have held a relatively large exposure to the latter (compared to its 1 per cent weight in global equity markets) but neither holdings would have been the mainstay of a diversified global portfolio. Most countries have instead seen 10-20 per cent losses.
The situation in emerging markets has been dark too – only Hungarian equities posted a gain in the past year (in US dollar terms), with typical losses across emerging markets of about 16 per cent.
So is this a window of opportunity for buyers? We can’t say for sure whether the current situation is a temporary suspension of stock market turmoil or the calm after a storm. Nonetheless, we view this as a chance to buy back in, if you ever sold out, or to add to your investments. Staying out of the market for a protracted period of time rarely pays. Equity bull markets, just like bear markets, are littered with worries about company bankruptcies, conflicts, and political strife.
Even if there is more trouble to come, it pays to hold stocks for the long term. Even if you had invested at the very peak of the last bull market in UK equities, in June 2007, despite the global financial crisis and recent falls, you would still have made a return of 33 per cent. If you had had a mix of other markets and other investments, you would have done even better than that.
What comes next?
The US economy is pushing ahead, despite the hit from a strong dollar and collapsing oil output. US employment is rising strongly and wage growth looks set to accelerate. Because of US strength, we don’t see a global recession as likely – indeed far from it. The US equity market is a bit expensive, but this is justified in our opinion.
Moreover, China appears to be addressing the widely-recognised issue of excess capacity in heavy industry. In late February, China’s minister for human resources announced 1.8m job losses in the coal and steel sectors. While this is a painful process, we see it as one of many positive signals that the worst is over for commodity markets.
For UK investors, should the possibility of the UK leaving the EU – currently put at about 30 per cent by bookmakers – stop you from investing until after the vote? As a principle of good investing, you should be globally diversified away from just holding UK assets. But as a historical comparison, while the UK market underperformed global stocks in the months leading up to the pound’s eventual European Exchange Rate Mechanism exit in 1992, that underperformance was quickly recovered. With the pound already at the lowest levels we have seen against the dollar in the past 30 years, the UK equity market is looking like much more of a bargain.
Looking at the global picture as a whole, we agree with Olivier Blanchard, former chief economist at the IMF, who this Tuesday called for a “reality check”: there have been many reasons for concern so far in 2016, but markets so far have been too pessimistic. Investors with long horizons should follow the Rothschild maxim – you can get a good price if you buy when there’s blood on the streets.