The market is gradually coming to its senses

When things change they often change very quickly. Look at your portfolio and you will see what I mean. The growth stocks and funds that have been making you money for years have tanked: shares in Scottish Mortgage are down 28% in three months. Value stocks are soaring: BP is up 40% in six months. And the fact that the UK offers a degree of inexpensive safety is beginning to be recognised. The MSCI World index has fallen around 6% so far this year. Thanks to its cash-producing, dividend-paying miners, energy producers and banks, the MSCI UK index is up 3.6%. If this carries on, 2022 could be the first year the UK has outperformed the world since 2011. 

It is hard to shake the feeling that we are witnessing a market gradually coming to it senses – recognising that it is possible to overpay even for great companies. Richard de Lisle of the De Lisle America Fund gives the example of Adobe. Its fundamental business is fantastic. It has grown its earnings by 19% a year on average for a decade and can probably continue to do so. It’s also down from $700 to $500. However, even at that price it is still on a price/earnings ratio of 50 times. Back in the early 1980s (when US inflation was last 7.5%) that kind of growth was priced at more like 20 times earnings. Adobe is a “fine name”, but right now, says de Lisle, “maybe not where you want to be” given how far the price has to fall – or the earnings rise – for the valuation to be reasonable. 

This is a point you can make about pretty much every growth company on the US market – and one that anyone who thinks the rotation from growth to value is coming to an end might bear in mind. Rising inflation (now 5.5% in the UK) is making markets focus on jam today over jam tomorrow – and if valuations are to normalise into this environment, the shift has hardly begun.

The grim future of money

One of the ways fund managers cope with their worries is to hold more cash. You’ll be tempted to do the same (see this week's magazine for how to save some). But in inflationary times, I’m afraid holding cash leads us inevitably into conversations about the nature of money. You might turn an eye to Canada where we are being offered a less amusing hint about the future of money. Earlier this week Justin Trudeau declared a state of emergency. Part of the power that gives to the state is financial: any bank can now freeze the personal bank accounts of anyone they suspect is linked to the protests with no further legal process. 

There’s a lot to ask about all this. But the key thing to note for now is that the pandemic has hugely expanded the range of tools governments feel it’s OK to use to control people’s behaviour. It isn’t our job to have a view on vaccine mandates (though I reckon you could guess mine) or truckers’ protests. But we worry about financial repression, about the loss of financial privacy and about the financial control digital cash offers the state. Last year the Bank of England discussed making a central bank digital money programmable – such that the issuer could decide how it was able to be spent. So perhaps no booze for alcoholics, no luxuries for those on welfare, no fuel for lorry drivers in the wrong place… see where this can go? And how fast it can happen?