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Are share prices now too high to justify returning?

The Brexit vote triggered an exit by many investors from British shares; for four years the UK stock market lagged its peers. The December trade agreement with the EU has resolved some of the risks, and the Pound has begun to recover. But the rebound has caught many by surprise - investors must wonder if they have missed the opportunity. Are share prices now too high to justify returning?

Adding to the mix of risks in this frothy stockmarket is volatility created by inexperienced share traders. Operating on low cost platforms, these ‘investors’ are encouraged by new investment gurus, possibly straying well beyond their expertise.  Just as the pandemic has created an army of online medical experts, social media is now a platform for unregulated and often questionable investment advice.  We might respect the achievements of one of the richest men in the world who has created the most valuable car company, but is he also an expert on Bitcoin?

The danger is that the huge stimulation given to the global economy over the past 12 months has boosted almost all financial assets.  Now, those with big – but usually unrealised – investment gains look wise.  In contrast, investors who have spread their assets more thoughtfully across a diversified and defensive portfolio may feel that they have missed out on the best returns.  But long term accumulation of wealth comes from performance in different market conditions – there are times when capital preservation is the most important part of investment strategy. We hear little of the many traders who lose, although statistics suggest it is the majority.

Speculation is certainly driving some areas of the stockmarket.  And few commentators really know much about the prospects for crypto currencies like Bitcoin.  Blockchain technology itself seems to have a big future, but there is a danger of conflating that with prospects for the coins.  And, governments will surely find a way to tax all this, should anyone think their Bitcoin assets are hidden and secure.  Many want to beat the investment establishment and find opportunities that the professionals have missed, but emotion in investment can be unhelpful. Equally, many investment professionals are currently reporting strong performance, but clients should view this critically. Not all genuinely represents foresight and good judgement: bull markets can flatter.

When stockmarkets are strong, fear of missing out is a natural emotion.  Cheap money is finding its way into the stockmarket and there may indeed be further gains to come, with a pick-up in inflation and more takeover bids.  But overall dividend pay-outs are down substantially since 2019 and turmoil could continue for a while in sectors such as property and travel. Investors need a medium to long term plan. That should not involve much trading, but backing businesses for the long haul and a spread of exposure.  There are new asset classes that might suit sophisticated investors - such as infrastructure, renewable energy and private equity funds - but all these remain high risk investments and need care. However, Bitcoin is not something that even most professional investors would consider.

Today’s bubbles are clear – well illustrated in headlines and social media.  There are always some bubbles, but they need not point to an imminent broader set-back in the stockmarket. Historically bonds have helped to diversify portfolios, but today they have more risk. If inflation does pick up, bonds and other fixed interest investments could fall. As a bull market matures, more and more investments get drawn into essentially the same bubble – as we saw with technology in1999 and banks in 2007. Investors should look out for this, and control exposure to shares with the biggest gains.

A version of this article was published in The Herald on 21/02/2021.