Comment: Nostalgia will not shelter us from the storms

IN DAYS long gone, stock market investment could be seen as a procession of brave barges moving along a wide and winding river. The waters could be choppy, but our barges could proceed with hope, fair progress and, at times, nobility.

Today the pageant of investors is scattered, rain-soaked and increasingly under water. Markets are a miserable spectacle. In this river of red, the front runners are at emergency stations and the laggards, when not sinking, are taking to the lifeboats.

In recent months, I have become a fan of Dexterity Momentum Investing, a nifty Edinburgh-based market analytics service provided by independent financial adviser Stephen Walters. The service tracks some 36 popular investment indices, focusing on 50 and 200-day moving averages. The service provides a weekday summary of 36 trend signals, puts the graphs on its website (www.dexteritymi.com) and alerts subscribers when trend signals have changed.

Recent e-mails from Stephen have been bathed in red. On Friday, five of the last seven equity indices dropped into “sell” territory. To offer a sense of how the economic gloom prevails and persists, he added a table of major single country indices published by MSCI. Of the 30-plus listed, every single one is showing a loss over a five-year period – ranging from minus 42.4 per cent (Greece) to minus 3.2 per cent (Singapore). The UK MSCI index is down 9.6 per cent and the US 3.4 per cent.

All indices are also down over a one-year period, and those showing a decline over a ten-year period are on the increase. Quite how pension providers are allowed to get away with sales projections based on 7 per cent a year growth is a mystery.

Walters’ twist at Dexterity is to offer an additional service concentrating on natural resource sectors such as water and timber. How smart that is looking. He is keen, not only on low-cost investment (exchange traded funds) “but also on thematic focus (for instance water, agriculture, food) more than just geography. ETFs are the ideal investment vehicles for these themes, and will become more popular”. It is a refreshingly intelligent approach to market tracking and investment decision-taking.

Whether there is any investment system that could have successfully guided us through the past 60 years is moot. Inflation has ripped through financial returns, causing anyone with a historical perspective to look sceptically at the proposal by Chancellor George Osborne of raising funds through a bond with a life of 100 years. The 1960s brought a sterling crisis, the 1970s an economic, political and inflation crisis, the 1980s a boom followed by bust, the 1990s the great information technology bubble and bust, and the past decade a credit boom followed by the greatest banking and financial crisis for more than a century.

Back in 1952, few could even imagine such storms ahead – indeed, the view of the future, even with the tail-end of rationing, real as opposed to ersatz austerity and the threatening overhang of the Cold War and nuclear conflict, was notably more positive than today’s.

Back in 1952 the UK economy stood at £300 billion (2008 prices). Today it is now circa £1,450bn, an increase of more than 380 per cent. The population of the UK has also risen over the past 60 years, from 50 million to around 63 million. In per capita terms the rise in real GDP has been some 285 per cent.

Surely, with all the technological innovation and the ending of the Cold War, investors would be immeasurably better off?

I am grateful to Stephen Lewis, market watcher at Monument Securities, for these facts and figures on how financial life has changed. The average annual rate of increase in retail prices over the 60-year span was 5.5 per cent, well above the 3 per cent rate estimated for the so-called Great Inflation of the first Elizabethan age. “In the sixteenth-century”, he writes, “the influx of Spanish gold from the New World boosted the money supply. In the years after 1952, the Bank of England, in common with other central banks, found other ways of increasing the volume of money in circulation. Unfortunately for investors, inflation did not run at a steady 5.5 per cent per annum, which might at least have allowed some predictability to be built into projections of prospective real returns. Rather, it varied from an annual 2.6 per cent in the 1993-2002 decade to 14.2 per cent in 1973-82.”

In 1952, the FT 30-Share index (there was no All-Share or FTSE 100 in 1952) stood at 115. Sixty years later it stood a shade above 2000. In 1952, it included such behemoths as Dunlop Rubber, Leyland Motors, Morris Motors and Swan Hunter. All came to grief – today’s market leaders, take note.

As for government stocks, War Loan was yielding 4.2 per cent in 1952, well below the average rate of inflation in subsequent years. Is today’s ten-year gilt yield of 1.53 per cent likely to offer any greater protection? A reading would suggest that we are taking a benign view of prospects. Quite the opposite is the case. Our barges are scattered in a sea of red.