I was in good company. It wasn’t just the Westminster bubble whipping itself up into a ‘will she, won’t she’ tizzy. A few miles to the east, the City was also in a lather over the rolling saga of ministerial resignations and leadership speculation. A sharp fall in the pound, plunging bond yields and domestically-focused shares like Royal Bank of Scotland and housebuilder Persimmon in freefall. It was one of those glued-to-your-screen days. The kind of day when investors do silly things.
If you wanted to create an environment in which it is impossible to make rational investment decisions, you would probably start with the combination of 24-hour news channels and echo-chamber social media that we inhabit today. It makes me nostalgic for the pre-internet clatter of the Extel newswire machine through which I watched the ERM drama a generation ago. There was a temptation to over-react then too, but it was easier to resist than it is today.
The market’s instinctive aversion to UK assets last week is understandable but possibly short-sighted. There is a compelling logic to the diverging fortunes of the ‘citizens of nowhere’ in the FTSE 100 - dollar-earning pharmaceuticals, oil and mining stocks - and the smaller fry in the FTSE 250 for which the prospect of a no-deal Brexit or Corbyn government is so terrifying. But the slide in banks, housebuilders, retailers, airlines and leisure stocks may have over-cooked it.
Things rarely turn out either as well as we hope or as badly as we fear. Even a no-deal outcome does not feel like a catastrophic risk to the UK economy. The UK’s financial system is well-capitalised and has been rigorously stress-tested. The cost and complexity of a mass nationalisation programme means a radical left-wing Labour government may find it easier to promise than to deliver. We’ve muddled through worse situations.
There is a long list of contrarian adages for moments like this. ‘Buy on the sound of cannons, sell on the sound of trumpets’ is attributed to Nathan Rothschild’s stock-market swoop before news of Wellington’s victory at Waterloo reached a wider audience. ‘Be greedy when others are fearful’ is Warren Buffett’s contribution.
A clear lesson from the current gyrations in the UK stock market is the need to differentiate between the short and the long term. In the next few months a dizzying array of outcomes is possible. The probabilities we should assign to no-deal, second referendum, leadership challenge, parliamentary approval, general election and all the rest are frankly beyond me and they will anyway undergo constant change over the next four and a half months. Anyone who attempts to pre-empt these possibilities is doomed to failure.
What can be said with greater certainty is that investing when a market is as unpopular as the UK finds itself today stacks the odds heavily in favour of a good long-term return. There is a straight-line inverse correlation between the valuation of an investment at purchase and its long-term performance. As Buffett says, ‘you pay a very high price in the stock market for a cheery consensus’.
You may well experience painful volatility in the short run but I would be surprised if investing in the UK today does not look prescient in five or ten years’ time.
To reassure myself on this assertion, I have just looked at a long-term chart of the FTSE 250 index. If you had invested in this collection of UK-focused companies at the end of September 1992, in the wake of Black Wednesday’s withdrawal of sterling form the ERM, and gone to sleep for 26 years, you would have made an eight-fold return. Backing Britain in the aftermath of that apparent humiliation would have felt extremely uncomfortable but would ultimately have been a good decision.
UK investors today enjoy an unusual combination of favourable valuation measures. Shares trade at a historically low multiple of corporate earnings. Those profits are growing reasonably strongly.And they are underpinning a level of income that looks compelling in an environment of lower-for-longer interest rates, which seems more probable than ever.
What is also clear from the diverging fortunes of different sectors last week, however, is that there will be winners and losers in the months ahead. The summer surge on the High Street is fading fast and the disruptive threat of the internet intensifying. House prices are rolling over. Utilities and transport groups will suffer if the 4/1 odds on Jeremy Corbyn being the next Prime Minister are accurate. Neither bonds nor banks are priced for the Bank of England holding fire on interest rates throughout 2019.
Because the short-term outlook is so uncertain, no-one sensible will be making big bets at the moment in the UK. The resilience of domestic bonds (gilts) even as home-grown shares have been flailing around shows the wisdom of a balance between different asset classes. The irrelevance of Brexit to investors in the US or Japan confirms the importance of geographic diversification too.
Investment is about weighing probabilities and paying the right price for the risks undertaken. On both fronts, the UK stock market looks a lot more attractive than it might seem as your head swims with the latest crisis headlines, via a flaky signal on a crowded train.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.