The bear trend isn’t over yet

In choppy stockmarkets, it's always worth taking a long-term perspective, says The Guardian. That's what Alastair Ross Goobey, the former chief executive of Hermes, did in a recent speech on the pension fund industry. His father, George Ross Goobey, launched the "cult of equity" by spotting value in shares in the early 1950s, and shifting Imperial Tobacco's pension fund money from bonds into equities.

Encouraged by stocks' strong performance in the 1950s and the concurrent slide in bonds, other pension funds followed suit. Since the bubble burst in 2000, however, it's been a different story, with funds heading back into bonds.

Alastair Goobey takes a similar approach. Equities have provided higher real returns over the long term, he says: there has only been one 20-year period in the past century when UK equities have not provided a real return. The obsession with bonds means buying opportunities in equities may be missed witness March 2003, when funds were lowering their equity holdings just as the dividend yield on shares rose above 10-year gilt yields, making shares look excellent value. Indeed, Goobey said at the time that it was the best buying opportunity in a generation. Advocates of a wholesale switch to bonds at any cost "are not seeing the wood for the trees". That said, however, this "fundamental fan of equities" is not keen on the stockmarket at present.

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Taking a long-term view, it's certainly hard to get too excited about the outlook. In the US, the S&P 500 index is still on a p/e of 19, and history shows that, after a bubble, p/es revert to the mean (about 15) and fall below it over periods averaging about 14-15 years before heading back to the p/e mean in the next long-term bull cycle. With the current bear trend not yet over, returns from here will be measly. A study of the years 1925 to 2001 by renowned investor Jeremy Grantham suggests that current p/es imply returns of 2% or less over the next ten years, says John Mauldin on Investors Insight. Talk about buying high.

The UK market also looks unexciting. The market's p/e did not fall to the single-digit level that would have signalled a long-term upswing before the 2003 rally. And market historian David Schwartz points out that, over the past two centuries, when markets outperform spectacularly over a 15-year period, they then underperform over the next 15. So given the sensational run-up to 2000, the chances of the FTSE regaining its millennial peak anytime soon are slim.