From the editor...
“When all the experts and forecasts agree, something else is going to happen.” Bob Farrell, a former head of research at Merrill
Lynch, formulated ten rules of investment that are regularly quoted on Wall Street, albeit rarely acted upon. Today’s consensus that the US economy can avoid a “hard landing” – a recession following the rapid monetary squeeze it has just endured – brings that aphorism to mind.
He also noted that “fear and greed are stronger than long-term resolve”, which explains why many investors have abandoned caution and piled into the market (see page 4); the S&P 500 index is close to a new all-time high. Investors believe in a soft landing, with dearer money gently squeezing out inflation, slowing growth without killing it off. Markets are further encouraged by the US Federal Reserve’s signal that it could cut interest rates three times next year; so encouraged, in fact, that they have pencilled in six reductions in interest rates.
A discouraging precedent
Yet history shows that soft landings “don’t really exist”, as Mike Riddell, manager of the Allianz Strategic Bond fund, puts it. “It’s either a hard landing or no landing.” And no landing implies that growth stays brisk but inflation remains sticky, Felix Zulauf of Zulauf Consulting told Barron’s.
That in turn could raise bond yields, denting confidence in stocks.
The debate about hard or soft landings does not apply to Europe, as here the economy never took off. In Britain we muddle along slightly below or above the zero-line, grappling with high taxes (see page 15), lacklustre business investment, record numbers out of work owing to longterm illness, and, not coincidentally, poor productivity. Economist Julian Jessop will take a close look at out perennial growth problem and suggest some answers in the new year.
It is also striking that after World War II, economic crises and downturns took place against a broadly quiescent geopolitical backdrop and a spirit of deepening international co-operation. But today that is no longer true, with China and Russia flexing their muscles and globalisation stalling.
The volume of world trade shrank at an average annual pace of 2% for most of this year, says the Netherlands’ CPB World Trade Monitor.
Given the poor outlook, investors should be building a margin of safety into their investments to temper the impact of any market declines. That means focusing on the UK and in particular, UK-listed investment trusts, some of which, as Rupert explains on page 17, are very cheap indeed. Emerging markets are also generally cheap (see page 5), and India remains a favourite of ours. It is not a cheap overall market, but as we often point out, it can be accessed through investment trusts on discounts to net asset value.
Promising sectors, meanwhile, include mining (see page 20), but as ever, play the theme with “picks and shovels” – equipment providers and their modern equivalents – rather than the miners themselves. Finally, equity investors sizing up well-established brands should bear in mind that nothing lasts forever (see page 14). Family Christmas lunches prove otherwise, many might think, but if you mention Merryn’s column on page 23, it should at least go with a bang. A very happy Christmas to all our readers. Your next MoneyWeek arrives on 5 January.
“The debate over hard or soft landings doesn’t apply to Europe, as here GDP never took off”