There is a chronic affliction plaguing markets and it is proving remarkably difficult to shake off. It has always been a feature of daily market life, but over recent years its grasp has quietly extended .
I am talking about short termism.Individuals, companies, politicians and policymakers have all been infected by this disease in some form or another. Expectations and time horizons are growing shorter, with interested parties opting for the quicker, more palatable solution at the expense of longer-term sustainable answers. Some of this is understandable. Companies in the US, for example, are reluctant to make investment or hiring plans until the elections and decisions around the forthcoming fiscal cliff are clearer and their future impact quantifiable.
Investing for the long term sounds a simple strategy but it is surprising how few adopt it. In today’s fast-paced environment, the desire for instant gratification runs through to investment-return expectations as well. To add insult to injury, the amount of ‘market noise’ over the last few years, as wider macroeconomic influences have driven investor sentiment and behaviour, makes long-term investing even harder. Investor jitters have become commonplace and the temptation to react to short-term news flow is huge.
What investors should worry about is permanent loss of capital and assessing an asset’s long-term prospects. If a company builds a factory, it expects returns from it for at least 10 years. Short-term price movements are inconsequential as they are largely about temporary loss and gain of capital.
We favour equities over developed market government bonds as, while they have generally had a strong year so far they still look attractive in relative terms. A recent Investec report claimed that “not since 1957 have equities been so attractively priced relative to bonds”. This is more a reflection of bond valuations than anything else. But with 10-year gilts at 1.6 per cent compared to the average yield on the FTSE100 for 2012 of 3.7 per cent, the case iss pretty strong.
Our view is that certain equity markets are cheap, the UK and Europe for example, and being brave enough to enter into the market now will be rewarding in the long-run. Bouts of volatility will have to be endured though and resolve could be tested.
An investment philosophy can be expressed in many forms, but common sense suggests buying a ‘poor quality’ asset at the wrong price is a bad idea. We dislike government bonds because we question the logic of buying an expensive asset in the hope that it will become more expensive. Why lend money to a government at 1.5 per cent return when it can simply print more at any time and devalue what you hold? We prefer to buy quality assets at a fair price and hold on to them. Shorter-term trading and over-exuberant attempts at market timing are fraught with danger. Value resides in real assets such as equities, but we have taken out some shorter-term insurance against prices pulling back in the coming months as the noise gets louder. But we have retained our overweight position to Asia as we remain bullish on the region.
To some, this long-term approach may seem boring, but consistent above-inflation returns are sought after. Investors would do well to take heed of the Guinness experience, waiting patiently for their rewards.
Aidan Kearney is co-head of Aberdeen multi-manager funds