‘SELL when the market is high, buy when it is low” is the classic starter advice for investors.
But, more recently, a counter-wisdom has gained support. It’s called “momentum investing”. Put simply, if there is strong support for a share or a market, join the throng.
There is certainly momentum in markets right now. In the United States last week, the Standard & Poor’s 500 Index hit a record high, rising above 1,700 for the first time.
And here in the UK shares have recovered from their wobbles over the mooted end of monetary loosening, or “tapering”. The FTSE 100 index rallied by a further 1.4 per cent last week to 6,647.9, while the FTSE 250, which is more reflective of the UK economy, has hit an all-time high.
To add to the buoyant mood, the stock market gurus at US financial giant Goldman Sachs have predicted that the FTSE 100 will hit 7,500 within the next 12 months – breaking through the previous peak in 1999 to a fresh record high.
To reach 7,500 would require a rise of 13 per cent from today’s level. But this is not too far-fetched when you consider that the index has risen by 11 per cent since June and is up by 18 per cent over the past 12 months.
But it is precisely the pace and extent of this recent advance that will cause many investors to hold back and wonder whether it is now time to look elsewhere.
Not only are many companies now standing on price-to-earnings multiples that well discount further recovery, but there is also much doubt as to what will drive the economy forward from here, given the markedly low level of business investment and continuing pressures on household incomes.
And over in America, where there are continuing encouraging signs of economic recovery – if muted by historic standards – there are worries that shares on Wall Street are already now fully priced even though the upturn has a long way to go.
So, although JP Morgan’s global market strategist Kerry Craig says that while signals on the economy point to further record highs for the S&P 500, others are less bullish.
The Investment firm Weitz Partners has some 30 per cent of its big funds in cash, as in its view shares on a fair-value reading are trading in the high 80 percentage range that, it says, “is probably close to an all-time high for us”.
A “buy low” investor today might therefore be tempted to look not at markets such as the UK and US, which have already enjoyed a strong run, but at those areas that have been distinctly out of fashion of late – ie, emerging markets.
Performance over the past three years has been miserable, with the MSCI emerging markets index returning just 5.9 per cent over three years, under-performing advanced economy markets by more than 30 percentage points.
M&G global emerging markets fund manager Matthew Vaight told Morningstar last week that, after the recent market falls, the valuations of emerging market equities are now compelling.
He said: “On a price-to-book ratio, emerging market equities are currently trading around their lowest level for many years and are cheaper than developed market shares by some 25 per cent.”
The best way in for private investors remains specialist emerging market funds and trusts. There are nine such specialist investment trusts alone, with discounts standing at 8.1 per cent for Templeton emerging markets and 10.5 per cent at JP Morgan emerging markets. This may be an opportune time to add to holdings here rather than chase already highly-rated US and UK markets.
Investments pay off during prince’s lifetime
Grandparents often mark a new arrival in the family by tucking away a lump sum investment for the future. These are much appreciated – especially if held for many years and with the investment income allowed to accumulate. So I am grateful to independent financial advice veteran Alan Steel for providing this arresting example in his latest “Letter from Linlithgow” e-mail.
The sum of £1,000 put in a deposit account at the time of the birth of Prince William in June 1982 would not have fared well, even assuming tax-sheltered individual savings accounts were available at the time.
By today he would have received £5,600 in total – but, while the £1,000 capital would still be intact in nominal terms, after allowing for inflation its value would have shrunk 4 per cent a year, halving the real value every 18 years.
The same £1,000 invested in an income fund such as Invesco Perpetual and with the income re-invested would now have risen to £74,500 – an astonishing performance, but a telling reminder of the power of compound income – the real motor behind long-term investment performance.
But such an investment back then would have been brave – such was the state of the economy and investor morale back in 1982, says Steel, “apparently only the clinically insane would pick equity investments over safe high-yielding deposits”.
Buy low and leave alone is the moral.