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History tells us that if you want to make money long term, equities are the best place to be, says Christopher Gibson-Smith, chairman of the London Stock Exchange, in the FT.
The nasty bear market that kicked off in 2000 has made many of us wary of the market, but “100 years of evidence” tells us it shouldn’t have. Over the past ten years, the nominal return on UK equities has been 5.8% higher than that on investment-grade bonds and 6.2% higher than the return on gilts. And that trend is set to continue.
Low interest rates “have raised the relative value of corporate dividends”, making equities look good. At the same time, the earnings outlook is pretty positive: consensus forecasts from analysts suggest earnings growth for FTSE 100 firms in each of the next three years will be higher than the average from 1999-2005. Overall, “the future of equity markets looks very positive”.
I wouldn’t be so sure about that, says Robin Griffiths of Rathbones in his annual World Investment Strategy Report. There has been much talk about the bear market, but the fact is that we have really been in a bull market for between 34 and 39 months. Yet the average bull cycle lasts a mere 32 months, which suggests “a downtrend seems imminent”.
Indeed it does, says John Authors, also in the FT. Those in any doubt should listen to the chartists. Their technical analysis is all about looking for “historical echoes” and, as anyone who has ever “overlaid a line of the Dow’s performance leading up to the 1929 crash with a line leading up to its peak in 2000 will attest”, those echoes should be taken seriously.
So what are the charts telling us now? Nothing good, says Steven Hocherberg of Elliott Wave International. It seems that there is a nasty correction on the way.
After a peak and fall like that of 2000, there is usually a recovery (like the one that brought the Dow to 11,000 last month). But these don’t last: they tend to be followed by another collapse.
Another worrying thing is that over the last four years, all markets all over the world have recovered together. Such correlations, says John Authors, only occur in the late stages of credit cycles: too much money is available, it is used for speculation and all markets rise as one. Then they all fall as one. “After the binge comes the purge.”
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How to invest
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by
Annunziata Rees-Mogg
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