EDITOR'S LETTERMerryn Somerset Webb
Until Tuesday, the US stockmarket had gone 109 days without a fall of more than 1%. On Tuesday the S&P 500 fell 1.2%. Oh, said one investor on Twitter: “so stocks can go down as well as up?” Indeed they can. And this is exactly the kind of time when they do. The last eight years have been all about falling interest rates and rising stockmarkets – to the point where it is hard for most of us to imagine anything else. We should.
As Robin Angus, the chairman of Personal Assets Trust, points out in his latest letter to shareholders, a great question to have asked yourself 30 years ago would have been what a world in which US ten-year Treasuries yielded 2.3% would have looked like. No one asked that question, since “to have done so would at that time have seemed as detached from reality” as asking ten years ago what a US run by Donald Trump would have looked like. Fast forward to today and the thing that seems most mad is not to speculate about historically low rates, but to wonder “about the possibility of a world in which US ten-year Treasuries may again yield 14%”. Still, mad or not, that development is worth wondering about.
It would be awful for debtors. It would be bad for any long-term bonds (and those who invest in them – think your pension fund) and pretty bad for the bond proxy stocks (blue chips with steady yields) that so many fund managers are still clinging too. But it is also a real risk. Interest rates at 14% might be some way off, but there is plenty of evidence to suggest that 4% isn’t. Inflation is rising all over the world: the latest numbers in the UK have it at 2.3% at a time when our base rate is only 0.25%. It’s also worth remembering that unpredictable politics are often a driver of inflation – and that the world looks deeply unpredictable at the moment.
This may not cause much immediate market trouble in places where stocks are cheap. But it will where they’re already horribly overpriced. In the US stocks trade on an average trailing price/earnings ratio of 25 times and the best you can say about that is that they aren’t quite as expensive as they were in 1929 and 2000. The good news is that not everything is quite so off-putting.
In our cover we look at how to benefit from the fact that the UK houses some of the best research universities in the world. Until a decade or so ago we were hopeless at finding ways to commercialise that. Now we are getting much better. Read our cover story to find out more. But before you rush out to buy anything, Max King adds another fund idea into the mix. We also look (again!) at the merits of investing in the Japanese stockmarket. The US is expensive and politically volatile. Japan is not. Given that stocks can go down as well as up, which would you prefer to hold for the next five years?