Last week, an analyst note by Andrew Roberts at RBS set off a series of headlines in national newspapers which spooked retail investors. This note will look at whether that worry is justified.
First though, a comment on the author of the note. According to research by the Spectator, Roberts has been bearish for at least the last 5 years. For example, in 2010 he said that ‘a cliff-edge may be around the corner’ and advised investors to ‘think the unthinkable’. Of course, since 2010 the markets have had a good run (since that prediction was made in June 2010 to 15 January 2016, the Top UK 100 Companies returned 40% and the UK All Companies returned 48%, both including dividends). This suggests that Roberts is a ‘perma-bear’ (an analyst who consistently tends to espouse a bearish view). There is a place in the investment community for these people, who challenge the consensus and stimulate debate. However, perhaps we should not be too surprised or alarmed when they do publish a negative note.
Let us now turn to the substance of the bearish argument. The heart of the negative argument is that the slowdown in China will ripple out around the world and push the world into negative economic territory. However, there are several problems with this view. Firstly, it is not what is happening. For the second half of 2015, China was already in slowdown. However, developed economies continued to improve. In the US, the unemployment rate dropped from 5.3% in June to 5.0% in December; in the UK in November (the last month for which data is available) Retail Sales grew at 5.0% year on year, compared with 4.2% year on year in June. This shows that economic growth continues despite a China slowdown. Secondly, believing that the China slowdown will continue and worsen, and so have global effects, requires a belief that the Chinese government will do nothing to avert such a situation. However, the Chinese government has already shown that it will not stand idly by. They have already acted, for example by adjusting the reserve requirement, and given the internal political importance of maintaining growth, it is highly likely they will continue to combat any downturn, mitigating the effects on Western economies.
The second aspect of the negative argument is the recent Federal Reserve rate rise. The argument is that a worsening economic situation will be exacerbated as the Fed pushes ahead with its plans to raise rates. This monetary tightening will weaken demand and so contribute to economic difficulty, the argument goes. However, the Fed continuing to tighten monetary policy is contingent on the improvements in the US economy continuing. Indeed, the Fed has made it clear in their statements that if necessary they would loosen monetary policy in order to support the economy, even being willing to go so far as to recommence quantitative easing.
Now consider the reasons to be positive about the economic situation. As already mentioned, the economic statistics in the US and UK indicate that the second half of 2015 was positive. Further, the oil price continues to fall, which will help to stimulate consumer activity due to cheaper petrol and fuel costs (particularly important during winter, when fuel usage is highest in many places) leaving consumers with more disposable income. Disinflation (zero to low inflation) has a similar effect: if earnings rise (which they are – in the UK, average weekly earnings rose 1.9% in the year to November 2015) whilst inflation is low then the amount available for discretionary consumer spending increases.
Further, investors should remember the adage that ‘time in the market beats timing the market’. It is very hard to call the exact top or exact bottom of a market. But what can be clearly seen is the general performance of assets. The Black-Litterman analysis, looking back over 100 years, shows that being invested has consistently and significantly outperformed being out of the markets. This is true even during periods of economic crisis. The UK All Companies reached its pre-crash peak on 15 June 2007. Seven years later on 15 July 2014 the total return (including dividends) was +34%, significantly outperforming cash holdings.
One of the most famous investors of modern times, Warren Buffett, argues that to successfully invest you should buy into the market at the very time others are most afraid to do so.
In conclusion, evidence suggests that the world is not on the brink of economic meltdown. Rather, it points to continuing growth. In our opinion, investors should continue to hold a well-diversified portfolio.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
