ALL PLAYING THE LONG GAME
Even the most confident financial growth forecasts can be swept away in times of global crisis, but Bill Jamieson is keen to remind us that history provides a message of hope
Bill Jamieson provides a glimmer of hope by looking through the financial history books
The best of forecasts can rest on the flimsiest foundations. It seems like only yesterday that we were in a state of mild euphoria over our prospects: Brexit was ‘done’, a new government was in situ, there was talk of a ‘Boris bounce’ and good hope of a gradual recovery through 2020. What had stock markets to fear?
Fast forward to today and such confidence has vanished in the face of the global coronavirus epidemic. The most carefully constructed economic forecasts have collapsed like skittles – as have world stock markets. World trade and just-in-time manufacturing is traumatised. Businesses – from manufacturing through to airlines – are teetering, while social gathering is disrupted. High streets are reeling from shopper desertion (unless they have a supply of toilet rolls), confidence has slumped and the lockdown is keeping millions indoors.
The ink was barely dry on confident growth forecasts – the CBI and EY Item Club predicting 1.2% growth in GDP, the Scottish Fiscal Commission on 1% – than the basis for these predictions was swept away. Now forecasts of GDP seem irrelevant as we stare recession – two successive quarters of falling output – in the face.
The virus has not just delivered an immediate shock to business and investor confidence. It has also raised searching questions on the future of globalisation – the basis on which assumptions about future growth and prosperity have been based.
What faith can we put in forecasting numbers now? Before coronavirus burst across the world, Mervyn King, the former Bank of England governor, and economist John Kay co-authored a disturbing book: Radical Uncertainty: Decision-making for an Unknowable Future. What timely reading this has made.
Their basic thesis is that we ought to be less willing to use numbers to forecast the future. Instead, we should be more open to the fact that the future is radically unknowable. Don’t ditch the models, is the advice, but be humble with them; include wide error bars and space within the model for unknown things to happen. Expect things to be unpredictable. Make room for what they call ‘radical uncertainty’.
It hardly seems helpful advice to be told that forecasts in the economic realm are barely worth the paper they are written on. And have we not long suspected this? It all seems a counsel of despair – until a perusal of our economic and financial market history presents a more hopeful message.
When we look at the history of economic setbacks and market slumps, such is their frequency and severity that few businesses would embark on expansion and even fewer would dare to invest.
There has been a cascade of recessions throughout history – 1857, 1873, 1893, 1907, the Great Depression of the 1930s, 1945, the stagflation of 1973-75, the sterling crisis and recession of 1990-91 and the global financial crisis of 2008-09. Each was accompanied by dire forecasts of poverty and the end of days.
There has never been uninterrupted calm and stability for business, still less in the world of stock markets. We had market panics in 1796, 1825, 1847 and 1866. More recently we had the devastating 1973-74 bear market, Black Monday on 19 October 1987, the Asian financial crisis of that year, the 2000 dotcom bubble and bust, the reaction to the 9-11 terror attacks, the financial crisis of 2008-09, the flash crash of 2010 and the 2018 global market downturn. Each one was accompanied by dire warnings of mass unemployment and the end of capitalism.
Who would dare trust sanguine forecasts of gentle
growth, let alone our pension savings over 30 years without a panic button to hand? But we continue to do so.
The billions we have entrusted to pension funds over our working lifetimes were never intended as a frantic pursuit of short-term gains and frenetic buying and selling with every turn in the market but as a long-term commitment stretching over decades.
For the longer-term view tells us that losses are overcome and gains re-established over time. Experience bears this out. For those who began their pension saving ten years ago, the MSCI World Index has returned 179%, despite the impact of recent market falls.
For investors now in their sixties who began investing thirty years ago, the FT All Share has generated a return of 938%. And for septuagenarians, the return on investments made in 1986 as measured by the All-Share would be 1,864% – even after the market slumps of the past month.
Business adaptation, re-invested income over time and the miracle of pound cost averaging – where regular monthly contributions through market falls help to lower average buying costs – work to power long-term investment returns.
And more positive and far-reaching influences kick in. Counter-intuitive though it may seem, periods of recession have worked to trigger remarkable advances in innovation and enterprise. The long depression of 1873 in the US saw a significant spike in patents. The immediate subsequent decades saw innovations such as the light bulb, phonograph and telephone.
In recent times, the 2007-08 financial crisis saw start-up activity surging in the US with 550,000 new businesses formed in 2009 alone.
As the brilliant economist Joseph Schumpeter wrote some 70 years ago, economic crises give rise to gales of creative disruption. And this crisis will be no different. Already we have seen the destructive element at work – an intensification of business failures and shop closures, and, most spectacularly, the collapse of already ailing airline FlyBe.
Such crises are a spur to adaptation and innovation and as we emerge from the virus lockdown later this year, ‘zombie’ companies driven to their knees by the global financial recession will go under and resources will be unleashed for productive growth. New businesses will be formed and existing ones reconfigured.
Indiscriminate panic selling in these conditions is counterproductive, resulting in the realisation of losses that could take years to make good.
Long-term and pension savings are spread across different asset types – bonds (which have held up relatively well) as well as equities and cash. Because of this, most portfolios will not be showing the extent of losses suffered by equity indices.
Second, a rebound when it comes will be difficult for investors to catch in time to capture the full benefits. Many prefer to wait until a recovery is established before embarking on a cautious re-entry – by which time much of the rebound will be missed.
Selling down now also involves a loss of dividend income and capital loss. As income is often the key consideration in our choice of stock market funds and trusts, that’s a double blow to our savings.
Re-invested income over time, and the miracle of pound cost averaging – where regular monthly contributions through market falls help to lower average buying costs – work to power long-term investment returns. Apprehensive private investors would do well to ponder the wisdom of past experience through this unnerving time.