Beware: things are not normal

With markets are all over the place, it is hard for investors to know what to do. But there is a strong chance that the assets that have done well over the last few years won’t do the same over the next few.

This is not a normal environment – and there is no reason to think it should be. The last decade has seen a variety of extraordinary monetary experiments and the last two years have jumped every possible shark. We’ve seen rolling economic shutdowns, a new level of quantitative easing (QE), helicopter money, insanely-low interest rates, the biggest recession ever, and of course, the biggest recovery ever. 

We’ve watched vast fortunes being made in tech stocks and in cryptocurrencies – and of course, in housing. Now we have supply crunches, the (fast) return of inflation, a shift in power from capital to labour, and one hell of a pivot from behind-the-curve central banks. With all that in mind you should not be particularly surprised that markets are all over the place, or for that matter that seeing through the noise is tricky.

It is hard to know what to do. However there is one thing it is increasingly clear that you should not do – and that is to retreat to the perceived safety of the assets that have done you well over the last few years. There is a strong chance they won’t do the same over the next few. Which assets do I mean?

First up is US stocks and tech stocks in particular. Keeping too many of these, says Ben Inker of GMO, is likely to be the first big mistake investors make in 2022. Their outperformance in 2020 and 2021 cemented the idea that they are the lowest-risk, highest-return version of equities ever – and recent volatility aside, a safe long-term option. But their outperformance has also made the US expensive – and so remarkably unsafe. You would be better, says Inker, to cut your US exposure and move into China and emerging market equities (much cheaper). 

Beware frothy valuations

Next is private equity and venture capital. Those worried about the future might see that some institutions have made fortunes here and pile in too. There are all sorts of problems with this (the difficulty of selling private assets in tricky times being an obvious one). But the key thing is price: valuations are “frothy” – too frothy to compensate for the risks. Remember too that the exit route for private equity (the bit where you get the money) is via public markets. If public markets aren’t prepared to pay as much for growth as they were (that’s why tech stocks are falling) private equity valuations obviously have to fall too. This is not a safe place to be. 

Third is US bonds. When markets fell in early 2020, US Treasuries were “wonderfully protective.” But the main reason bonds outperform in bad times is because central banks can and do cut rates into the downturn. This option wasn’t available in the likes of Switzerland and Sweden in 2020. The result? Their “previously reliable defensiveness” was no longer available. That may now be the case with Treasuries. They protected you in 2020. They probably won’t in 2022.

Eagle-eyed readers will have noticed something here – the core problem with all these three things is price. A bond can only protect you if it isn’t already horribly overpriced. A very expensive growth stock can only keep making you money if investor perception of the value of that growth doesn’t change. A private equity investment can only make you money if you don’t overpay for it. You can only think that these things are safe if you think their price doesn’t matter. It usually does.

Recommended

Why UK firms should start buying French companies
UK stockmarkets

Why UK firms should start buying French companies

The French are on a buying spree, snapping up British companies. We should turn the tables, says Matthew Lynn, and start buying French companies. Here…
28 Sep 2022
Three funds for investing in Japanese value stocks
Japan stockmarkets

Three funds for investing in Japanese value stocks

Japanese stocks have fallen out of favour with investors, but they are looking ripe for recovery, says Max King.
28 Sep 2022
The end of cheap money hits the markets
Stockmarkets

The end of cheap money hits the markets

Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
28 Sep 2022
How the end of cheap money could spark a house price crash
House prices

How the end of cheap money could spark a house price crash

Rock bottom interest rates drove property prices to unaffordable levels. But with rates set to climb and cheap money off the table, we could see house…
28 Sep 2022

Most Popular

Earn 4.1% from the best savings accounts
Savings

Earn 4.1% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
27 Sep 2022
How much is King Charles III worth?
UK Economy

How much is King Charles III worth?

What will King Charles III inherit from the late Queen? Will he have to pay inheritance tax? And how large is his personal fortune and estate?
23 Sep 2022
Beating inflation takes more luck than skill – but are we about to get lucky?
Inflation

Beating inflation takes more luck than skill – but are we about to get lucky?

The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank…
26 Sep 2022