BACK in late 1973, when I started as a financial journalist in the City of London, markets began to tumble.
A venerable city editor, working for a middle-market Sunday newspaper, pronounced that the fall in share prices was “a pause for breath on the staircase of prosperity”.
Over the following 18 months the market fell by 73 per cent.
Ever since, I have winced at market commentary resorting to the “pause for breath” explanation. It never does to assume that setbacks are as short-lived or as benign as we wish.
Investors today have cause to ponder whether we are seeing a pause for breath or something more serious.
Wars, insurgency and ethnic terrorism stalk the Middle East. The Ukraine, recently being wooed as a prospective EU member, is in civil war. Relations between Russia and the West have deteriorated and there is an escalating trade war. And underneath these tensions is the prospect of an end to emergency central bank support for the financial system and a resort to higher interest rates. After a five-year bull run that has seen a substantial recovery in world stock markets, investors thus have good reason to take some money off the table. The FTSE 100 lost a further 1.7 per cent last week to close at 6,567.36, down more than 4 per cent from its 12-month high. In America, the S&P 500 is down a similar percentage from its all-time high of barely three weeks ago. In Germany, the Dax index has fallen by 10 per cent, matching the conventional definition of a “correction”.
Many look to the autumn with apprehension, fearful that interest rate rises will slow the recovery pace and that international tensions are unlikely to ease any time soon. But it’s important to keep in mind the threats and vulnerabilities we do not face. In 1973-74 the world was facing a near tripling of oil prices. Inflation was out of control.
Government and the trade unions were locked in a bitter showdown over “who governs Britain”.
The challenges we face today are worrying, but not nearly so severe. Inflation is subdued at 1.9 per cent. The concern over average earnings is not that they are rising too fast but not rising enough to broaden our economic recovery. And almost all forecasters have had to upgrade their predictions for this year and next – not lower them.
Arguably more important is the view, across both the Bank of England and the independent commentariat, that interest rates are not set on a runaway course but that rises are likely to be modest and gradual.
And the external environment remains largely benign. One exception is Europe, suffering from double trouble of incipient deflation and the full brunt of the Russian trade embargo on food imports. A resort by the European Central Bank to its own version of quantitative easing (QE) cannot be long further delayed.
With this exception the global economy continues to enjoy slow but steady growth. Wall Street has not been struck down by sudden, unforeseen threats but on the contrary, changes in monetary conditions that have long been signalled. The US upturn is gathering pace and investors have had more than a year to adjust to QE tapering off and the prospect of a rise in interest rates.
The biggest worry for investors is where they can secure any real return on assets without taking on an excessive degree of risk. At the “safe” end of the spectrum there are government bonds: the yield on ten-year gilts now at a 12-month low of 2.48 per cent. For those reluctant to lock away money for such long periods, there are deposit accounts and cash Isas offering between 1.25 per cent and 1.95 per cent.
And then there are equities. The current dividend yield on the FTSE 100 is 3.2 per cent. The further the market falls, the higher goes the dividend yield, acting as a countervailing pull to alternative and generally lower-yielding assets.
Investors looking for a spread of income-orientated shares have an abundance of funds from which to choose. Looking at the investment trust sector alone, there are 24 in the UK equity income sector, of which 15 are yielding 3 per cent or more. There is Invesco Income Growth yielding 3.63 per cent and Edinburgh Investment Trust yielding 3.92 per cent. Both are standing at discounts to their net assets and both have performed strongly in capital terms over three and five years.
In global income there are ten investment trusts, nine of them yielding more than 3 per cent. Scottish American Investment Trust is yielding 3.18 per cent and Midas Income & Growth yielding 3.96 per cent. There may be better places to see out a “pause for breath on the staircase”, but not many.