Are equities dead? It’s one of the questions that investors and those involved with personal finance have been asking for some time. It is hard to look back and see an era when equities were held in lower regard.
How many people now actually invest in equities? That is, of course, a trick question.
Let me simplify that query; how many people in the UK buy single stocks over the long term to build a portfolio? In my assessment, very few now do so.
There are still lots of people trading their money away, but not that many are investing “properly”.
The stock market has never been more like the race track, reserved for upmarket gamblers. Meanwhile, there aren’t many horse-owners going to work on a horse. The sad thing about it is it doesn’t have to be that way. Investing for reasonable return is pretty easy.
They are apparently amazed you can make money at the stock game. It’s ironic but illuminating, that criminals think stocks are a bent game, rigged like any other scam.
Who can blame investors for thinking that when all you need to do is look at the Facebook IPO. How could that IPO be anything but a trap for the unwary mark? If Facebook was a pharmaceutical that performed akin on a patient like Facebook has performed for its private investor audience, people would be in jail.
The sophisticated investor doesn’t look at stocks this way and instead sees a much bigger picture in which Facebook is an opportunity to make money on many levels. However, this is not a game the private investor understands, instead they see the same rigged game that the felons are amazed can be “beaten”.
So what is the future of equities?
Most trading is now driven not by investing or trading, but by hedging and arbitrage. Equities have become a piece in a much bigger picture where all financial instruments are important for their liquidity and correlation with other assets, like currency or commodity or credit risk.
Investors and pure traders in equities are just another flow into the complex turbulence of global markets bonded at the hip from one end of the world to the other.
As such, the equity markets are simply a function of money supply. This is why QE ends up boosting the equity markets. The connection between QE3 and the Dow is only two or three correlations away and a loose whisper from a day’s 200- point rally.
This leaves the call on the market as, how much QE is there to come? Does this mean that the US survives with 2,3,5,7 per cent interest rates any time soon?
The answer is surely no. As such, the only way to suppress interest rates is QE4, Q5 and so on.
Whilst people look on at the equity game from the sidelines, the real rigged game will remain interest rates. As equities rally on, disillusioned private investors will miss the party.
The end game is the destruction of their fixed income and cash assets because, in the end, economics will force a rebalancing on the political layer. That won’t be pretty, but it is over the horizon for now.
Meanwhile, you might think about buying a portfolio of stocks; low p/e, high dividend, big cap and with a high sales to market cap.
It might help you escape the coming US comeuppance.
l Clem Chambers is chief executive of stocks and shares website www.advfn.com and author of 101 Ways to Pick Stock Market Winners
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