Simon Evan-Cook, Senior Investment Manager at Premier Asset Management, considers the dilemma currently facing investors; whether to invest now, when equities aren't obviously cheap, or to be patient and wait for a sell-off to make them so.
The challenge facing investors today is determining whether now is the right time to invest.
When assessing likely future returns, the height or duration of a market rally are actually not that relevant. Valuations of the stocks within the market have historically proven to be a far better indicator. And, in general, these look fair at best for most markets, or expensive if you're looking at the US. "Fair" here means able to generate returns that are average by historic standards, so perhaps mid-single digit nominal returns: nothing spectacular, but still worth having.
That, however, tells us nothing about when the next sell-off will be. The timing of these are all but impossible to predict and are not dictated by the prevailing level of valuation.
The challenge currently facing investors is whether to invest now, when equities are not obviously cheap, or to wait for a sell-off to make them so. The real problem is not knowing whether this valuation dilemma will be short-lived (i.e. "acute", in medical terms) or if it is here to stay (i.e. "chronic"). Unfortunately, in order to achieve the best outcome, the acute and chronic scenarios require radically different treatments. Clearly, it would be handy if we knew which it is before the fact. But sadly we do not. To make matters worse, taking the 'acute' course of action could be costly if the problem proves to be 'chronic' and vice versa. There is a lot at stake.
When assessing likely future returns, the height or duration of a market rally are actually not that relevant. Valuations of the stocks within the market have historically proven to be a far better indicator.
I have therefore been considering the range of choices available to investors, and their potential outcomes, if they invested £100k - or not - for the next ten years. It occurred to me that, coincidentally, investors in 2007 were facing a similar conundrum. Markets had risen a long way, which left them feeling "toppy", and valuations were best described as "fair", if not expensive. Given that coincidence of timing, I thought it would be interesting to see how the decisions from my analysis would have turned out if they had been made back in the summer of 2007.
The results were surprising (in a good way). It turns out that the actual experience of 2007 to 2017 was eerily similar to the hypothetical 2017-2027 experience I had originally forecasted.
Just as they were in 2017, markets were hitting new highs in summer 2007. This always gives cause for concern, but conditions otherwise felt fairly benign. Yes, we now know the financial crisis was beginning to kick off - the run on Northern Rock happened in September 2007 - but that was not widely appreciated at the time.
Then, as now, we had no idea whether the valuation dilemma was acute or chronic. The benefit of hindsight tells us that the situation was acute (i.e. short-lived) back in 2007, as the Global Financial Crisis provided the catalyst for a sell-off. Equities immediately tanked, then rebounded at a faster pace. Just 18 months later, the investors' dilemma had disappeared. Valuations hit dirt-cheap levels. Well, it theoretically disappeared. Investors should have been filling their boots with shares in the eye of the storm, but this is far easier said than done.
Investors who bought in the summer of 2007 still made respectable absolute and real returns over the following decade. This was in spite of buying at the worst point for several years.
While the numbers are different, I found that the actual outcomes over the initial ten-year period were very similar to those implied in the forward-looking analysis for the next ten. Cash underperformed CPI, meaning a real loss to anyone who had spent the whole period huddling in their savings account. The UK stock market, meanwhile, produced very useful nominal and real returns, thereby rewarding anyone who was prepared to risk switching their cash for equities and then hold firm. 18 months in though, this would have felt like terrible timing, as markets plumbed their crisis troughs. Sure enough, the worst outcome came from panic selling at that point, then remaining in cash. The best result came from the (highly improbable) feat of staying in cash from the stock market peak to trough, then bravely shovelling all of your wealth into the market at what felt like the heart of the crisis (the start of March 2009).
But to get back to my original point; investors who bought in the summer of 2007 still made respectable absolute and real returns over the following decade. This was in spite of buying at the worst point for several years (before or after) and having to sit through the most brutal financial crisis since 1929. The lesson? A long-term perspective is perhaps the most important weapon in any investor's armoury.
At Premier, we assess the valuations of different assets and markets on a whole host of measures, with a view to roughly estimating what they might produce over the medium to long term as opposed to guessing how politics and macroeconomic events will unfold in the short term. Premier multi-asset funds are managed to achieve their specific, pre-defined long-term (no shorter than five years) investment objectives. None, to be clear, are managed with a view to specifically 'winning' over the next three to six months.
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For more information about Premier’s funds or portfolios, contact Simon Morris, Head of Strategic Partners, on 07738 958 072, or email email@example.com.
This article is for information purposes and is only to be issued to financial intermediaries. It is not for circulation to retail clients. It expresses the opinion of the investment manager and does not constitute advice. Reference to any particular stock does not constitute a recommendation to buy or sell a stock. Persons who do not have professional experience in matters relating to investments should always speak with a financial adviser before making an investment decision.
Issued by Premier Asset Management. ‘Premier Asset Management’ and ‘Premier’ are the marketing names used to describe the group of companies including Premier Fund Managers Limited and Premier Portfolio Managers Limited, which are authorised and regulated by the Financial Conduct Authority of 25 the North Colonnade, Canary Wharf, London E14 5HS and are subsidiaries of Premier Asset Management Group plc. The registered address of all companies is Eastgate Court, High Street, Guildford, GU1 3DE. Premier Portfolio Managers Ltd is registered in England no. 01235867. Premier Fund Managers Ltd is registered in England no. 02274227. Premier Asset Management Group plc is registered in England no. 06306664.