Cover of MoneyWeek magazine issue no 575

Made in Britain

10 February 2012 / Issue 575

The manufacturing revival

PLUS:

  • Profit from Asia's growing demand for coal
  • Facebook could kick off a new tech boom
  • Why you should stick with gold

Excerpt

Let’s call a spade a spade

What drives markets? You probably think it is valuations. Cheap markets rise and expensive markets fall. You’re partly right. There’s plenty of evidence to show that the price of a market (preferably expressed by a Shiller, or long-term average, price/earnings ratio) gives us a pretty good steer as to what will happen to returns over the following ten-year period.

That’s why we started telling you to buy income-producing defensive stocks a few years back. And it is why we came over quite bullish on European stocks last year. In general, we approve of the time-proven and straight-forward investment strategy of buying cheap stuff, waiting for it to turn into expensive stuff, and then selling it.

But valuations don’t tell us much about what happens to markets in the short term. That’s about something completely different: it’s about money and sentiment. When I wrote in the first letter of this year that we felt more bullish about developed-world equities than we have in a long time, this is what I meant. Sentiment was exceptionally bad – that meant it wouldn’t take much to turn it around. There was also a wave of new money on the way from the Fed and from the ECB.

• Read the full editor’s letter here: Let’s call a spade a spade.