Alan Steel: Sir Alex could raise economists’ game

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ON WEDNESDAY, the big story was the impending retirement of Alex Ferguson after more than 26 years in the hot seat at Manchester United.

Next up was good news from scientists at Edinburgh University, who’ve discovered sunshine is good for us after all.

I belong to the first generation granted decent holiday entitlements, which since the late 1960s have been increasingly spent in the Mediterranean sun. These days, we’re told to stay out of it and lather ourselves in Factor Three Million to avoid skin cancer. Now the experts tell us sunshine is good for us because it lowers blood pressure, which in turn reduces strokes and heart attacks.

Meantime, in the financial world, experts don’t come bigger than US economists Rogoff and Reinhart, much feted by politicians who religiously follow their advice when trying to fix economic damage caused by the 2008 banking meltdown.

Researching the years since the Second World war, they allegedly found when a developed country’s debt reached 90 per cent of GDP (income), economic growth fell from 3 or 4 per cent to below zero. In other words instead of an economy growing, it shrunk. And everybody believed this to be fact. Our Chancellor is one of many who has built tax and debt reducing policies on the back of these “findings”.

However, like the fresh findings about the benefits of sunshine, independent analysis of Rogoff and Reinhart’s work found errors and inaccuracies in the so-called data they had collated. It seems their conclusions are wide of the mark, with GDP merely slowing a little rather than slumping.

Economists go on about “real” GDP and “nominal” GDP. When they really want to depress us they use the “real” number which, in what the rest of us call the real world, isn’t real. Confused? No wonder. What academics call “nominal” GDP is actually our everyday lives. “Nominal” GDP (income, remember) includes inflation. That’s the real world! Try nipping into your local supermarket insisting you’ll only pay the bill in “real” (after deducting inflation) pounds and see how far you get.

The dictionary meaning of “nominal” is “not as things really are”. Hmm. At the end of 2011, world income in nominal terms was $66 trillion. At the end of 2001 – in the wake of the terrorist at tacks on the US – it was estimated at $31tn. It more than doubled in ten years, while world stock market indices hardly moved.

In just over four years, at a time when pessimists were telling us it was too early to risk our savings buying shares and equity funds, those prepared to risk coming out the shade have seen substantial increases as some stock markets have doubled.

But what’s next? Independent analysis firm Ned Davis Research has bad news for economists. It finds that, in terms of GDP growth, it’s the tortoises – low growth economies – that produce the best long-term stock market returns.

Over the long haul, funds investing in businesses with decent rising dividend records tend to hold up better in the bad times, unlike faddy growth stocks, which tend to collapse in price.

Ned Davis says he’s in the business of making mistakes. Winners tend to make small mistakes, losers make big ones. He, like the best long-term fund managers, prefers to make small mistakes and learn from them so he can produce better results.

Alex Ferguson was given the Manchester United job less than a year before the October 1987 stock market crash. And he, like equity fund managers over the following three or four years, struggled to win against the odds. But Ferguson, like brave fund managers such as Neil Woodford and Anthony Bolton, thrived under the pressure and went on to win handsomely.

He would have made a great fund manager, Sir Alex Ferguson. Now it’s time for him to bask in the sunshine. He’s earned it.

• Alan Steel is chairman of Alan Steel Asset Management