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Why 2013 may be a great time to start investing
A leading investor explains how savers can look through our economic troubles and see the opportunities for growing their money.
by Gavin Lumsden on Nov 30, 2012 at 14:26Follow @GHLumsden
Richard Buxton, the fund manager at Schroders whose 10-year record I gleaned for 10 investment lessons in the summer, has written a really interesting and encouraging article on why now is a great time to be investing.
Buxton manages the Schroder UK Alpha Plus fund, which despite the best efforts of the financial crisis to spoil things, has delivered good returns since its launch in 2002.
It is Buxton’s belief that we ‘are in the foothills of a new bull market’ in the UK. By this he means that when we look back in 10 years’ time we may see that the UK stock market, as measured by the FTSE All Share index, defied the economic gloom we’re currently facing and rose a long way, making investors money in the process.
You could say that Buxton (pictured) would say that, wouldn’t he? Indeed it would be an unusual fund manager who argued you shouldn’t invest.
However, there is a ring of truth to Buxton’s argument. Firstly, he has credibility. When he launched his fund ten years ago Buxton correctly anticipated that the bursting of the dot com bubble at the end of the last century signalled that the booming stock market conditions of the 1980s and 1990s were over. Fund managers like him would have to work harder to make money in a market that would trade sideways, he thought.
Well, as it turned out the market didn’t go sideways exactly. But if you look at a chart of the FTSE All Share you will see Buxton was right in that the index is still below its peak at the start of 2000. It soared to another peak in 2007 before crashing and recovering in fits and starts over the past three years.
Essentially, Buxton was correct, the market has gone nowhere, hence the depressing tag of ‘the lost decade’ that is often used to discourage investors. However, do remember that even in this hostile market investors enjoyed a decent total return from the UK stock market, but mainly only through reinvesting the dividends their investments paid out.
So what of the future?
The crux of Buxton’s message to new investors is to forget about the poor economic outlook and focus instead on the fact that because of all the economic doom and gloom the UK stock market is reasonably good value at the moment.
He says that when he forecast over a decade ago that share prices would go sideways he was not looking into a crystal ball to foresee the financial crisis and the credit crunch. He was simply acknowledging the fact that the UK stock market at the time was expensive. Share prices then on average traded at more than 20 times their earnings. Today that figure has fallen to 11.
Buxton is making the point I made in my recent video outside Queens Park Rangers stadium that it is the price of an investment that drives the return. Follow the mantra of ‘buy cheap, sell high’ and you won’t go far wrong.
The UK stock market is not cheap but it is fair value. According to Buxton, history shows that when UK shares trade at 11 times earnings there is a good chance that the following 10 years will see them generate positive, above inflation annual returns – perhaps even as high as 10% or more.
Don't be a pessimist
I think there are two important points to be taken from Buxton’s article. One is that it rarely pays to be too pessimistic when investing. Cautious optimism is the order of the day. Secondly, avoid going with the crowd and try to be a bit 'contrarian' in your outlook.
It is an interesting exercise to cast your mind ten years into the future and to imagine what it would be like looking reviewing the decade to come.
It is just possible that Buxton is right and that the three big things many investors are worrying about today will seem minor in retrospect. The big worries are:
- the threat of the US ‘fiscal cliff’ that could see the world’s largest economy fall back into recession next year as a result of $600 billion of automatic tax rises and spending cuts;
- the slowdown in China – can it avoid a ‘hard landing’ that would disrupt the global economy?
- the eurozone financial crisis – will the euro survive if countries like Greece are forced to leave the single currency?
Up the down escalator
A cautious optimist can find reasons to play down each of these threats:
- US politicians are likely to find a deal that will turn the ‘cliff’ into a ‘gentle slope’, in Buxton’s words. Meanwhile, the US economy is showing encouraging signs of growth on the back of a recovering housing market.
- No one outside China really knows what goes on inside the world’s second largest economy and real risks remain. But with the leadership transition over it is more likely that the dangers have subsided.
- Similarly, although the eurozone debt crisis is far from over and much of Europe is stuck in recession, we may have passed the worst. The European Central Bank has said it will do whatever it takes to preserve the currency union and after a seemingly endless list of summits the politicians seem to be getting to grips with the real issues.
Besides, one of the enduring mysteries of investment is that the behaviour of the stock market is not linked to short or medium-term trends in the economy. In other words, it doesn’t pay to get too hung up on the big picture.
As Buxton says, the stock market tends to move in a ‘series of escalator-type movements’ in which long periods of poor returns are followed by long periods of much better returns. Given that starting valuations for share prices today are attractive after an extended poor period, the next phase may well be up.
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