Are shares now yesterday's story?
By
Associate Editor
David Stevenson Mar 12, 2009
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Stocks: was it all a big con?
Those who've been brave, or foolish, enough to stick with their stock market investments over the last 18 months have lost a packet.
But most experts will tell you to look at the bigger picture. And that you're almost bound to make money in the long run by holding shares.
But how long does the long run have to be? UK stocks have now plunged so far that many people have made no money for at least twelve years! And a couple of pundits have recently been pointing out in The Guardian just how badly served they've been by the financial industry over the last decade or more.
"The conventional wisdom is that shares always outperform other investments over the long-term", says the Guardian's Rupert Jones. Over ten years, all the data suggested he'd be "in the money" by salting away money in an equity Isa, he says. But in fact, "nothing could be further from the truth. My £50-a-month stock market Isa has plummeted in value by 22% in just six months, and worse, is now worth less than I've paid into it, even though I've held it for almost ten years. I'd have been better off putting the money under the mattress".
Last week, columnist Max Hastings also had a go. "Knowing less about fund management than koala bears", he started pension saving almost 30 years ago, and therefore thought he could consider himself "well pensioned". Not so, apparently.
Despite "putting my old age in the hands of allegedly respected partnerships and institutions, never allowing, far less encouraging, them to gamble, today my fund is worth 30% less than in 2001", says Hastings, "and significantly less than the face value of cash that I have paid into it since 1980".
There's a real, and growing, risk for stock markets here. Their smaller supporters could now start deserting - in droves. And that would be very serious. As Jones asks: "are we all victims of the great stock market swindle? Like millions of other Brits, I've lost my faith in the investment industry and the way it tries to tempt us to buy."
Of course, this sort of apocalyptic talk doing the rounds means that investor despair could be building up to a climax. In other words, for the moment at least, the last seller may well be close to selling out, which would mean a short-term bounce at least.
And the latest Equity/Gilt study from Barclays Capital shows that over the last 110 years, "there have been 16 ten-year periods like the past decade in which investors who prudently re-invested their dividends have lost money after inflation", says Tom Stevenson in the Telegraph. But "each time, they made money in the next ten years, by an average of almost 11% a year even after factoring in rising prices".
That at least sounds encouraging. The problem is that this time could prove to be the exception. Britain is on the verge of a virtually unprecedented corporate seizure.
As Graham Secker at Morgan Stanley pointed out this week, UK profits could fall by 60% from peak to trough in the current downturn. Earning at non-financial companies may slump 24% in 2009 alone. That adds up to a worse performance even than the Great Depression of the 1930s when Morgan Stanley's data reckons that profits fell by around 57%. And if the pound weren't plunging – i.e. increasing the value of foreign currency profits – the profit drop would be nearer 70%.
This all puts non-financial stocks on a 2010 P/E (price to earnings multiple) of 10.9 times. But while this would be the lowest rating for the FTSE 100 index since 1984, there's no reason it can't fall even further. Secker has looked at the UK market since the 1930s on the same basis as the US Shiller P/E, which compares current share prices with average inflation-adjusted profits over the last decade and is "perhaps the only valuation metric that investors are really focusing on".
He's cut his forecast for the year-end FTSE 100 to 3,500, though that may still be optimistic. If share ratings fall back to "historical rock-bottom levels", we could yet see a further 1,000-point drop.
That would be yet another massive nail in the coffin of the long-term equity bulls – and would no doubt encourage more small investors to abandon stocks altogether. While individual stocks may be cheap, we still wouldn't buy that index tracker just yet.
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