Voters forget governments’ unfairness and ineptitude, for that is what they expect. But they don’t forgive governments that make them poorer, which is what this government has done since the financial crisis 10 years ago.
Moreover, the recent Budget made it clear this impoverishment will continue through at least the next decade, perhaps even longer.
British equity investors have had a better time of it, and their alternatives remain unattractive. Cash yields at best 1-2 per cent, while inflation is already 3 per cent a year and may well rise again in future.
Gilts are overpriced by any conceivable yardstick, at the very moment that central banks the world over are beginning to rethink their policy of quantitative easing (QE), akin to medieval kings and tyrants’ practice of debasing the currency.
Extremely low interest rates helped banks and their corporate customers survive the worst banking collapse since the 1930s. QE’s purpose was to encourage companies to invest, either to increase capacity or improve productivity, and thus stimulate employment and pay. This experiment with our money was additionally intended to frighten savers out of cash or relatively safe investments such as government bonds, and into real but risky assets such as property, private businesses or the shares of quoted companies.
Confidence and consumption
The policy has saved the banking system for the present, but has proved, to those willing to see, that the ‘trickle down’ theory of wealth creation is crazy. Boosting asset prices simply makes the rich richer, and does nothing for the poor.
Austerity has kept demand low, increased income disparities and ensured that political tensions remain high. Modern economies are built on confidence and private consumption, and companies only invest when they see a rising demand for their products; otherwise they leave the money in the bank or return it to their shareholders.
Historically, rising inflation or higher bank rates push gilt prices down. However, reducing the amount of cash available to the markets at the same time as QE is scaled back could well have a catastrophic effect on sentiment, and affect all asset prices.
The pied pipers of the investment world, having failed with active and passive investment strategies, are now experimenting further with the discredited efficient market hypothesis – the idea that it is impossible to beat the market.
Investment factors such as size, value, momentum, quality, and low volatility are at the core of smart beta or factor-based investment strategies, which promise to enhance performance over time. ETFs have lured in much investment capital with this promise.
Safety first investing
Common sense should protect sensible and patient investors. Investment funds managed under corporate law, more commonly referred to as investment trusts, have significant advantages over all other forms of collective investment, as Table 1 shows.
Managers know how much they have to invest and know that they have it forever; they can plan sensible investment strategies without worrying about outflows or inflows of investable capital as market conditions and investor attitudes fluctuate.