Prepare for the return of 1970s-style markets

Prepare for the return of 1970s-style markets

A return to the market conditions that prevailed in the 1970s could lie ahead for investors, and most advisers clients are prepared for it, according to John Stopford, head of multi-asset income at Investec.

Mr Stopford said many investment portfolios are constructed on the basis that bonds and equities are inversely correlated, that is, that when equities fall, bonds rise in value.

He said this strategy will have worked well for decades, with ageing populations since the 1970s keeping demand for the income from bonds strong and precipitating an extended bull market in the asset class, while equities have performed well for most of the past decade boosted by quantitative easing.

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But Mr Stopford said: "The disaster scenario is that the withdrawal of quantitative easing and higher interest rates means that bonds and equities fall at the same time, that is like the 1970s.

"If that is the starting point, what can one invest in? Well maybe precious metals, and of course you can't lose money in cash.”

The ending of the policy of quantitative easing is likely to be bad news for bond investors.

Quantitative easing involves central banks purchasing bonds, which pushes the price up, as those buyers exit the market, demand falls and the price of bonds falls.

When the price of a bond falls, the yield rises, and this is bad news for investors in most equites.

This is because, if any investor can get a higher income from a low risk bond, equity investments, which are usually riskier than bonds, become less attractive.

Mr Stopford said quantitative easing coming to an end just at the point when economic conditions around the world are slowing, could mean those equities, which typically do better when economic growth is strong and so are less susceptible to movements in the bond price, will also fall in value.

He said many investors have responded to the relative lack of value in bond and equity markets by investing in alternative assets, but he said there could be issues with liquidity.

Mr Stopford said: "In particular, many investors have put capital into the private debt market, but as the yield on government bonds, which are a safer asset class, rises, then there is less reason to own riskier debt.

"That could prompt a lot of investors in that part of the market to head for the exit, and they could find its a very small door."

Peter Elston, chief investment officer at Seneca, said he doesn't believe the present volatility in asset markets is a sign of a significant bull market, as most economic data continues to point to economic expansion.

But David Scott, an adviser at Andrews Gywnne in Leeds, said if advisers have cash right now they should keep it there rather than commit it to asset classes that could fall.

Mr Scott said: "If you are invested, be wary of the most expensive asset class, and equities are the most expensive. I think for where we are heading, government bonds are a bit of a safe haven.