Well, the phony war is over. The holiday season is behind us. What we have to do now is get down to the real business of making money for our clients. And what are our clients asking? They want to know if the secular bull market is over.
To be fair, they probably don't use the word secular, believing as I do that such a term has little relevance for markets and is associated with worldly rather than church matters.
But divine inspiration is not required when determining how shares are likely to behave. Bull markets do not continue indefinitely. Regardless of the ups and downs in the interim period, this one has continued pretty much unabated for more than two decades. It encompassed a period when the cult of the equity achieved considerable support among private investors, while the valuations people are prepared to consider when purchasing shares expanded vigorously, to use the current jargon. That such a shift in markets took place is justifiable if you look at what happened during this period. Communism all but disappeared. Technological advancement created greater efficiencies in almost every area of endeavour. The globalisation of the marketplace, both in terms of corporate activity and consumer habits, reached levels that few could have anticipated.
The legacies of this period are, by and large, beneficial. Inflation may still be present but the extravagant spikes of the past have been largely eliminated. Markets now set the agenda for governments. Economic co-operation between sovereign states is at an all-time high. A low-interest-rate, low-inflation environment with steady economic growth no longer appears to be just a pipedream.
But is that enough to justify continuing expansion of valuation criteria? (Sorry, I mean more expensive shares.) Only if the level of economic growth can continue at a hig her level than that we have become used to. By that I mean long-term sustainable growth, not just occasional bursts from time to time. Baring Asset Management's Michael Hughes believes this to be quite possible. Indeed, looking at figures he presented at the Sofa conference last month, I had not realised that the average level of world GDP growth had been so low during the last century.
Even in the period from the mid-1970s to the late 1990s the average was only 1.2 per cent. Hughes believes the next quarter century could see sustainable economic growth three times that figure. Why? Well, technological advancement is making a big difference and not just in IT. In medicine, too, we are seeing some enormous leaps. This creates a further driver for the market, in that so-called grey power will become an even bigger feature within consumer spending. It is the propensity to spend that is likely to keep markets driving forward.
The real question is what sort of investment return we might reasonably expect. Here, I am more cautious. The uprating of equities over the past 20 years may not go much higher. High economic growth and low inflation should mean that equity markets are still capable of delivering better returns than bonds but we have all been privileged to be present at a time when returns have been exceptional over a lengthy period. It becomes more difficult from now on.
This is the message I will be taking with me as I hit the road again now the new millennium is well and truly under way. It is a positive message but one tinged with just a hint of caution. We may have seen the most profitable years for the fund management industry. Or then again demographics could mean that we go on growing at an unheard of rate for the next few years. I know which I would like to see but I am far from certain what the actual outcome will be.