Mark Twain once said history does not repeat itself but it rhymes. Well I have been taking a look at past performance of the markets, and I am wondering if I can detect a rhyme, because if I can that may tell us something about the future.
1 September 2008. Back then the media had pretty much made up its mind that the economy was in big trouble, but the consensus – that is to say the view of markets and economists – was far more sanguine. Then on Saturday August 30 Alistair Darling let the cat out of the bag. He said the UK was facing its worst economic crisis in 60 years. His comments drew much derision. “What is he on?” pretty much summed up the reaction of many. The BBC quoted a spokesman from the treasury as saying: “These are the same difficult economic circumstances that every other country in the world is having to deal with…But with employment levels near record highs, interest rates that are historically low and the past decade of rising incomes and job creation, the UK is well placed to deal with this.” See: Darling warns of economic crisis
Looking back, it is tempting to say those who were so quick to mock the beleaguered chancellor were the ones who were ‘on something’. But then we have the benefit of hindsight. Psychologists have looked into hindsight. There is such a thing as a hindsight bias. We can fool ourselves into thinking that something was obvious after the event, even though not many thought it was obvious at the time. Psychologists have proved it. Hindsight bias is something that affects us all.
But today, I am going to be wise in hindsight. Supposing on the first trading day after Darling’s comments you had invested £100 into the FTSE 100, and $100 into the Dow. Ignoring dividends, (which I admit is quite a big thing to ignore) today your money invested into the FTSE 100 would now be worth £117. The money you invested in the Dow would now be worth $130. But now let’s take into account currency movements. Sterling has lost 15.6 per cent of its value against the dollar since that day. In September 2008 $100 was worth £55. Today, the $130 it would have grown to if you had tracked the Dow with your money would be worth £84. So that is growth of 54 per cent.
I find that pretty interesting. The UK economy may have tanked since then, but the FTSE 100 has done okay. The US stock markets, however, have performed much better and taking into account currency movements, even better still. And who would have thought that? After all, the economic crisis of 2008 was made in the USA. It was caused, or so we are told, by the sub-prime debacle. I have never bought the argument that sub-prime was the sole, or indeed even the main cause of today’s woes. I think there were deeper forces at work, and sub-prime was more a symptom than a cause. But nonetheless, my point remains. The US may have been the place where it all started, but after allowing for currency movements, it has seriously outperformed the UK.
Still with hindsight, Capital Economics put some interesting numbers together. Over the past five year, the return on UK gilts has been 52.4 per cent. Corporate bonds have offered a return of 48.4 per cent, equities 27.1 per cent.
But then again, over the last year, the best performing asset class in the world was Greek government bonds –up a staggering 173 per cent. Now if someone had asked me a year ago, should I buy Greek government debt I think I would have used the words barge pole and don’t touch – all in the same sentence. The second performing asset was Turkish equities, followed by Portuguese government, followed by Swiss, then Spanish and then Japanese equities. The 13th best performing asset class was Greek equities. Hindsight bias would tell us the assets were very cheap a year ago, so such rises were inevitable. Hindsight bias is distorting history.
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