In the 1950s, decades of information about stock market prices were combined with advances in computer technology to produce the efficient market hypothesis.
As discussed in last month’s column, the theory – which maintains that markets reflect all information and are thereby impossible to beat – seemed good at the time and helped managers rethink their ideas at a time of institutionalised change for stock markets. But 70 years later, innumerable events have long since proved it false.
Investors need to discern the future, however thick the fog and rain, and be brave enough to invest in their educated guesses.
The best way to do this is through investment trusts. Table 1 and Table 2, reproduced from last month, show how this can be done – and also how to hedge the bet. This hedging (similar investments in contrasting countries, or styles) is important because of the simple reason that the future could be especially challenging.
Trade wars are now well under way, the US under President Donald Trump is pulling out of the post-war Pax Americana, populism is on the rise as western governments fail their economic and immigration tests, and countries are losing their tax base as nearly all large international companies find ways to legally avoid paying tax.
Two of the world’s major economies have much in common, including each facing their own individual crises – a fast declining and ageing population in Japan, and Brexit for the UK. Both societies are stable and traditional, but that can also mean conservative and slow to change.
Japan has bet on robotics as the answer, not only to its own problems, but also those of the western world. And Prime Minister Shinzo Abe, with his so-called ‘Abenomics’ programme of reforms, has begun to address some of the uncompetitive elements of the economy and has been rewarded with electoral success.
The UK, on the other hand, has a badly skewed economy. It is home to some high-quality manufacturing plants, and some even more valuable and well-paid service sectors. But elsewhere prospects of decent jobs are poor, and these neglected cities have more in common with early 20th century Britain than the 21st century.
These are the differences that influenced the Remain and Leave votes in the 2016 referendum. As yet, neither of the main parties has thought through these economic weaknesses, both imagining that Brexit will help magically turn the UK into a new global powerhouse.
Those siding with the Brexit optimists should choose City of London IT, an equity income trust investing in middle-of-the-road companies, and one deemed a ‘dividend hero’ by the Association of Investment Companies because it has raised its dividend for more than 20 consecutive years.
Unless Brexit is a disaster, or the government fails to address the need for better education, better infrastructure and the rebalancing of the economy after the departure from the EU, then this investment company should serve investors well.