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Brian Tora: Beware the headline promises


With the summer holidays upon us and the City of London sweltering in Mediterranean temperatures, it is difficult to take the business of investment too seriously. 

Perhaps this is just as well given the multitude of geopolitical issues which markets appear to be comprehensively ignoring. With tensions rising between Israelis and Palestinians, no end in sight for the Syrian conflict and the situation in Ukraine entering a new phase, we are spoilt for choice as to where the next upset might occur.

It was with some surprise, then, that I picked up a piece of research from an economic consultancy last week that reinstated a previous overweight equities recommendation. At the end of May it was expecting a pullback in global equity markets which in the event took place only in Europe. The Euro Stoxx broad equity index peaked on 10 June and by the time this research was published had retreated by 6 per cent.

Germany and France reflected this behaviour but European bourses suffered more during the period. Italy fell by 10 per cent while Portugal, hit with a further banking crisis, had dropped by more than 20 per cent by early July, pushing its market into official bear territory. Asian markets and the US, in contrast, managed to post rises during late spring and early summer, the US achieving all-time highs.

But we have had a robust reporting season, with companies generally surprising on the upside. Not that this prompted this respected economics house to reverse its earlier decision. 

Barclays’ barometer

I was reminded of the Barclays Equity Gilt Study, published in February. Originally compiled by the stockbroking house of de Zoete & Bevan, which was acquired by Barclays along with stockjobber Wedd Durlacher to form BZW, the forerunner of Barclays Capital, the study will reach its 60th birthday at the end of 2014. Looking at long-term performance records, it concludes equities provide the best returns.

In this year’s study, the annual gross real return for UK equities, which includes dividends but is net of inflation, amounts to 5.5 per cent for 20 and 50 years. Remarkably, over 10 years, a period which includes the financial crisis, it only drops a little to 5 per cent. Barclays also made a case for US equities not being as overvalued as was considered the case at the start of 2014. That was a good call.

So perhaps it would be unwise to dismiss the return to bullishness from an economic forecaster. The risk that a further escalation in the Middle East or Ukraine could derail its strategy is admitted but the reality is that many of the alternatives do not look too exciting. Cash, for example, has delivered negative returns over the past 10 years on an inflation-adjusted basis. This is reminiscent of the 1970s when inflation was a serious issue and interest rates much higher than today.

True, today’s investment options are much wider. Earlier this year I came across an advertisement for an opportunity which suggested that a 40 per cent return was possible over as short a period as 18 months. Intrigued, I followed the link to learn more on the worldwide web. The proposition was to help finance the building of new cemeteries. It was an opportunity I felt able to pass by.

Brian Tora is an associate with investment managers, JM Finn & Co


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