On the Money

Keep calm and you too could win gold

Alan SteelJust under two months ago the consensus of “experts” following the UK Brexit vote was “we’re all doomed”,  to quote Dad’s Army’s Sgt Fraser.  

And it wasn’t just the UK that was allegedly up that creek without a paddle. The entire world was in the same boat, “they” assured us.

How many times have I heard stuff like this?  All the way back to 1973 when I started doing this job!  But patient equity investors who’ve ignored repeated predictions of disaster over the last forty odd years have done very nicely, thank you very much.  But sadly too many believe arch pessimists who are wheeled out when there’s a supposed drama,  turning it into a crisis every time.

So how recent is this obsession with “Aw naw, the baw’s burst”?  You will be surprised to know it goes back a long way.

Eighteenth century philosopher Johann Wolfgang von Goethe said: “I find more and more that it is well to be on the side of the minority, since it is always the more intelligent.” 

Long forgotten economist and free thinker (there’s a contradiction in terms) William Jevons in the 19th Century added: “As a general rule it is foolish to do what other people are doing because there are almost sure to be too many doing the same thing.”

From a study of UK investment flows in June/July you can easily see where the herd stampeded to – cash deposits, “safe” bonds and Absolute Return funds.  Although a significant splinter group piled into what’s probably the most successful equity fund of the last 5 years…Fundsmith,

So what’s happened since the Brexit shock vote on the 23 June?  The FT All share Index shot up 8%.  And while UK Equity Income funds, by and large, have lagged the Index over the same period, international income funds have easily outperformed thanks to the weakness of Sterling.

But we shouldn’t be dragged into this obsession of short-termism and fear.  Over three and five years all our recommended UK equity income funds have outperformed the Index while millions of risk averse savers sit shaking with fear in areas going nowhere fast.

So, let’s take a step back and think about perspective.  “They” said Brexit would be bad for stock markets and economies, not only here but all over the globe.  Have you any idea how much the UK accounts for world income (or to give it its favoured  term GDP)? Only 4%. That’s a measly one twenty fifth in old money.

This month a report was published on the world’s biggest 500 quoted companies as measured by income, not perceived capital value a la stock markets.  

So this is the real world not one driven by investor demand and sentiment. The collective income of the top eleven is equal to Britain’s entire income (or GDP).  Only 25 British companies make it into the top 500.  Our biggest income earning company is BP, in tenth place with a lifetime best, well outside the medals.

Walmart, with an income last year of $482 billion, took the gold medal while the next three places were occupied by Chinese companies competing for silver and bronze.  And here was you believing “experts” who say China is a busted flush.

The league table last year looked like this: US in first place with 134 companies and in second place China with 103.  By the way, only ten years ago China had 19 in the top 500.  How’s that for progress?

Japan is next with 52, despite what we’re told about its problems. Back in sixth place is Britain with only 25.  And just to add more perspective, the combined income of the top four US companies is bigger than our 25.

So if you are not investing internationally in equity funds you’ll continue to miss a trick.  But surely it’s too late to join the equity party, given the gains made since early 2009, I hear you say. 

Ever heard of the Fear/ Greed Spectrum?  It goes something like this. Stock markets bottom when extreme fear peaks, and collapse when euphoria rules.  

Judging by the continued nervousness of investors running for “safety”, plus the pessimism of quoted “experts”, chances are we’ll be fine sticking to quality international  equities until at least the next Olympics in Tokyo.   

Alan Steel is chairman of Alan Steel Asset Management

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.


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