Here's a prediction that I know will definitely interest you
"The FTSE 100 could double over the nextten years."
Wow! That's quite a bold prediction, isn't it? It comes from a research report just released by some clever bods at Citigroup. They say it will take ten years to happen. But their message is clear: long-term, we should be a lot more optimistic about the outlook for UK plc.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Now I know what you're thinking: 'what a load of self-serving tosh!'
But I've got to say, I haven't really got a problem with their analysis. This may shock you. But over the long term, I think that Citigroup is right. So today I'd like to tell you why I think you need to buy the FTSE. And I'll recommend what I believe is the best way to do it.
Inflation will sort everything out
Back in the eighties, my grandpa let me in on an old rule of thumb he'd always used. He said that the price of things doubles every ten years.
That was his observation. It basically says that inflation tends to run at around 7% a year.
To put that another way, it says the value of your cash halves every ten years...
And looking at fuel and food bills, you may well expect the value of your cash to be falling somewhat quicker.
Of course, when you look back over time, you find the reality has been somewhat different. During the seventies inflation was higher and more recently lower.
But overall, when you even out the decades, 7% looks about right. I suspect we're finished with what Mervyn King dubbed the 'nice' period. That is, the Non Inflationary Constantly Expanding nineties and noughties.
We've had all the benefits of deflation from cheap imports and relatively low commodity prices. And now we're going to have to pay.
Let's relate this back to the FTSE. As the Citigroup report points out, the FTSE has morphed into an international index with a massive commodities theme. Around two-thirds of earnings are produced abroad and commodity related firms seem to be attracted to a London listing. You've probably noticed all the new weird and wonderful foreign oil groups and miners that now make up the core of the FTSE.
My view is that long-term commodity prices will remain strong and the pound weak. Put the two things together and I come to thesame conclusion as Citigroup... earnings (in sterling) will stay high. Not least because of inflation!
In fact, Citi calculates earnings growth of 6% p.a. for the next decade. Now that's not far off my grandpa's 7%...
And yes, all other things being equal, that could mean the FTSE doubles over the next ten years.
Inflation rebalances the global ledger
Ultimately, I think it'll be inflation that resets the imbalances in the world.
Those imbalances primarily being that the West is too rich relative to the East. And certain groups (particularly the baby boomers) in the West are too rich relative to others.
Inflation is already redressing the imbalance.
Weak Western currencies mean that we pay more for our imports than in years gone by. And as Chinese workers demand better pay, it's going to increasingly mean that we as a society pay more for our luxuries.
You'll hear plenty of talk from the likes of Saga about how inflation is 'robbing' their members blind. Many pensioners live on a fixed income. Most annuity policies taken out these days (an insurance policy that pays your income after pension) are a fixed monthly payment payments that don't go up with inflation.
So as inflation goes up, the value of what pensioners get goes down. Remember, you could be looking at losing half your purchasing power every ten years!
And I've got some sympathy with retirees. But the way I see it, this is part of a global trend. Weak Western currencies and strong new demand from the emerging world.
Inflation is how we pay!
So what do you do?
Saga's director general (and general mouthpiece for the old) Ros Altman makes a strong argument for how retirees are losing out.
She says that since 2007 inflation for the old has been running at nearer 20% than the reported 4.8%. Now that's quite a difference largely down to fuel and with the oil price stubbornly high, things are hardly likely to get any better there.
Among other things, she blames quantitative easing (QE) the money printing that's weakening the pound and ultimately reduces our purchasing power.
Fair enough. But here at The Right Side we don't like to moan about things over which we have no control. We just get on with it.
One way of doing that is to buy the FTSE. I don't say we put all our money down. In fact, my 25% allocation to equities is kind of small in the grand scheme of things.
But we need some inflation protection. Stocks aren't perfect, but over the long-run they're worth having. As general prices go up earnings should go up and give us our inflation hedge.
Of course, over the short term anything could happen. A stock market crash certainly isn't out of the question. And the assumption that firms will be able to maintain margins while prices head up could be wrong. I'm not even going to rule out a period of deflation before inflation hits.
That's why we have to tread carefully here.
My advice is to buy high dividend stocks. Studies show that over the years, high-yielders tend to outperform... that's because most of your performance comes from dividend reinvestment. A dividend yield can also help steady a stock's downside potential. With modern day exchange-traded funds(ETFs), there's no need to pay an exorbitant fee to get in on a high-yield fund.
In October, I tipped the i-Shares FTSE UK Dividends Plus ETF. It's a way of buying into the top 50 yielders in the FTSE 350 and it's currently paying out 4.79% as a yield.
This is not a matter of going 'all-in'. I have my reservations about the stock market in the short term. After all, I recommended taking a punt on the VIX on Friday.
So to hedge against a sudden adverse movement in the market, you could consider building a position with monthly purchases. Ask you broker if they offer a special rate for monthly contributions. You may find that you'll need to open an Isa or a special account.
Over the long run, Citigroup may be right. We don't want to take the risk of sitting out of this market. Not with a near 5% yield anyway. But beware, shares are risky. Now more than ever. If you can't afford to lose money in the short run, then don't invest here.
Ticker: IUKD.LN
Price: 757.75p
52 Week High/Low: 809p/606p
Market Cap: £506m
Distribution Yield: 4.79% (paid quarterly)
This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Important Information
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is a regulated product issued by Fleet Street Publications Ltd.
Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. https://www.fsa.gov.uk/register/home.do
-
Should you invest in UK equities?The FTSE 100 hit a record high this week, but UK equities remain unloved and undervalued compared to their global and US peers. Should you snap them up at a discount?
-
State pension errors: DWP urged to check for mistakes among divorced peopleFormer pensions minister Steve Webb says there are a high number of divorced women on low state pensions. Now MPs want the DWP to check if there were any errors in “potentially underpaying men and women who are divorced”.
