Wealth Watch: Ignore the doom and gloom – the future looks rosy

Published on Saturday 17 January 2009 13:09

ONE of my New Year resolutions was to stop watching the news on TV because it's so depressing these days. But, typically, a couple of weeks go by into the new year and you forget your resolutions.

I forgot the other night, and wished I hadn't. The bad news was mind-numbing. A chap apparently representing the British Chambers of Commerce was telling us how his members saw the coming year as the worst since records began. And that must have been a long time, because as far as I'm aware, CDs replaced records at least 20 years ago.

His wrist-slashing analysis was accompanied by scary words such as "doom", "dire", "unprecedented" and so on.

So how accurate are the views of the members of the Chambers of Commerce? Remember: this is about what they think is going to happen over the next 12 months, not what happened last year. What were their views last year? Well, we don't know, but we can only assume they were positive because there wasn't such a big news story.

And if they were positive about what was going to happen in 2008 they were wildly mistaken.

Now don't get me wrong. I appreciate we are now in recession, here and elsewhere including the US. But what does history tell us about times like these? And how do stock markets behave before we hit recession, once we're in it and once the light at the end of the tunnel can be glimpsed?

If you look back over the last 100 years or so for similar times (and there have been very few as scary as this) you'll find there's good reason for optimism. Every single time a stock market has gone down so heavily, the following year there have been substantial gains.

Here's a wee test. The S&P 500 is the main stock market index of the US, measuring the share performance of the 500 largest-capitalised companies there. Take the worst-performing 50 stocks in the year to November 20, 2008, and have a guess what their average increase in share price has been since then to January 10.

Everybody I ask about this has guessed between 20% and 30% up, because they assumed the answer is a positive one. The actual average increase of the 50 worst performers in the S&P in the year to November 20 is 112.3% up!

And this turnaround in performance has come right across the board in equity markets. In one month to the early part of January, 50 unit trusts showed gains of 20% or greater for investors brave enough to hold on or for those with the exceptional courage who bought in the darkest times of November last year.

The top 10 performers over the period all produced 30% gains or higher and were dominated by natural resources funds. This is the clearest guide yet that the global boom is far from over and that TV's obsession that this recession will scupper China, Russia and the US, to name but a few, is far from the mark.

Highly regarded US analysts Ned Davis Research, to be fair, were cautious about equity markets and the US economy over a year ago, but over the last couple of months have turned increasingly bullish for equity investors despite the news dominated by doom and gloom.

They are still naturally cautious, pointing out that there are still some debt problems out there and they would like to see a bit more buying activity from institutions. However, the 20 factors they study on a day-by-day basis covering a range of economic indicators are now flashing 19 bullish and only one bearish.

We know the majority of economists are still sitting in extreme levels of pessimism, but it should be remembered most of them have elbows and rear ends that are interchangeable.

I leave you with the thoughts from two of the world's finest investors, Warren Buffett and Sir John Templeton. Buffett in the last three months of last year invested 40% of his own personal wealth into equity markets – and we're talking billions here. That wise old man Sir John Templeton was fond of saying "selling when others are greedily buying and buying when others are despondently selling requires the greatest fortitude and pays the greatest reward".

With all due respect to the members of the British Chambers of Commerce, I think I'd rather follow the advice of people like them.

• Alan Steel is chairman of Alan Steel Asset Management