So what should we do with our savings? There is obvious demoralisation among the professional investment strategists, for most of them failed to foresee the vicious nature of most markets last year.
When last year you were really, really wrong, it is hard to view the coming months with much cheer. In the US, a typical view is that equities have further to fall before a recovery can happen.
Here in the UK, the noise about recession, strikes and inflation drowns out the more encouraging signals, so when a company reports that business is actually pretty good, as did last week, it comes as a surprise.
Unknown: Markets go in cycles, but timing them is impossible
more than 12 per cent in the past five days, a nice reward for investors who ignored the consensus.
For investors there are two questions. When will the mood shift? And where are the most reliable ways of taking advantage when it does?
On the first there is a very simple answer: we cannot know, but it is always better to be too early than too late.
Markets go in cycles, but timing them is impossible. The analogy I find most helpful is to imagine you are trying to catch a rural bus that comes roughly every hour but sometimes is a bit early and sometimes a bit late.
You are much better to show up ten minutes early, even if it means standing in the rain, than to arrive on the dot of the hour and find that the bus went through a bit early and you have to wait another hour for the next one.
It is rare that share prices fall two years on the trot, but it does sometimes happen. So while the chances are that markets will end 2023 higher than they are now, this might be one of those instances when the next bus – the next bull market – arrives late, in this case in 2024. But it is not worth taking the chance of missing it.
And the best ways of taking advantage of the return to a positive outlook? It’s difficult, and whatever anyone does must depend on their individual circumstances. But the plain fact is that equities have historically produced a better real return than fixed-interest alternatives, notably gilts.
The most recent Barclays Equity Gilt Study, which goes back to 1899, shows that UK equities have produced a real return over those 122 years of 4.9 per cent.
By contrast, gilts have delivered 1.3 per cent, and cash only 0.6 per cent. That was to the end of 2021, so the numbers now will be a bit worse, but not radically so.
Over the past 20 years, the gap was narrower: equities have produced 2.9 per cent, and gilts 2.4 per cent – cash was minus 1.1 per cent.
But the past two decades have seen the FTSE 100 index go sideways, while gilts benefited from a long slide in interest rates so that a couple of years ago the yield on ten-year gilts was below 0.2 per cent.
That was the lowest it has been since the Bank of England was founded in 1694, and doubtless long before that. To say it was abnormal is an understatement. You can see why I think it is a no-brainer to favour equities.
Which ones? Reason says that UK residents should consider having some money invested abroad. The UK is around 3 per cent of the world economy, so it must make sense to have some funds invested in the other 97 per cent.
As it happens, the big companies represented in the FTSE 100 index earn more than three-quarters of their income outside the UK, either from export sales or the activities of foreign subsidiaries.
So an investment in a cross-section of the Footsie corporations is a sterling-denominated bet on the world economy.
But the index is also skewed towards ‘old’ enterprises, such as finance, oil and gas, mining, Transportes retailing and so on. There is relatively little exposure to big tech, and none to the now rather battered, but still huge, tech giants of West Coast America.
