This year will be the “final year of pain and disappointment” for investors. Or so, at least, say the usually bearish strategy team from Société Générale – Albert Edwards, Dylan Grice and Andrew Lapthorne. I went to listen to them speak at a seminar on Monday, hoping to learn exactly what it is that will be so great about 2013.
I’m not sure I came away with an entirely satisfactory answer, but the good news is that we seem to agree on most major market points. We agree that given low growth and quantitative easing (QE) it’s possible US and UK bond yields could go lower. We also agree that while that may make them a good short-term holding, they’re an almost insane long-term investment. If you have an insolvent government, a fiscal crisis and a central bank willing to print money, in the end double-digit inflation is pretty much a given.
We are slightly more bullish on America, perhaps, than Edwards, but we share his view that the hard landing in China isn’t something we need to wait for: it’s probably already on the way. We also doubt the Chinese state can do much about this. It has barely dealt with the fall out from its last massive stimulus and it is hard to see how it can afford another.
We then find it hard to see how commodity prices can have much of a year. Much of the impetus behind rising commodity prices has come not only from US QE, but also from Chinese foreign-exchange intervention: their attempt to prevent their currency rising has, in effect, meant a huge amount of QE, which has seeped into commodity markets. But the newly rising dollar makes yuan intervention unnecessary, which explains why commodity prices as a whole have been falling and why they’re likely to keep doing so for now (barring any nasty supply shocks). For years the problem with the yuan has been that it has been too weak. Perhaps as exports slow it will look too strong. That’s something for those betting on its non-stop rise to consider.
On to the good news. The universe of quality stocks with attractive yields that pass Société Générale’s quality test is on the up. The same goes for their deep value screens. The universe of “cheap and safe” stocks is getting bigger. That matters for the simple reason that among all of the things we don’t really know about markets and economies, there is one thing we do know: if you buy things when they’re cheap, you have a better chance of making good returns over the subsequent decade than if you don’t.
Grice has a chart (that he shows every year) demonstrating this with reference to the S&P 500. If over the last 130-odd years you’d bought it at its most expensive, your returns over the following decade would have been around 1.7% annualised. Had you done so at its cheapest, that number would’ve been 11%. Waiting for value is boring, but it also works – and in this cycle at least, your wait is nearly over.