Mario Draghi managed on Thursday to talk down the euro – the latest volley in the cover ‘currency wars’. Ralph Atkins, capital markets editor, analyses the president of the European Bank’s verbal game theory.
Death, taxes and investment
Benjamin Franklin always accepted the US constitution might be changed; “the only things we can be certain of are death and taxes,” he wrote to French scientist Jean-Baptiste Leroy (if Leroy had known about the planned new top rate of 75 per cent in France he’d surely have agreed).
Death is not really relevant to investors; you can’t take it with you, after all. But taxes are vital – and often ignored by those looking back at past returns.
This makes some charts from Stanhope Capital, which runs money for wealthy families and charities, particularly handy. Jonathan Bell at Stanhope looked back at past tax rates in the UK and calculated the returns needed merely to beat inflation, for a top-rate tax payer. Read more
Low interest rates suggest low equity returns – and even worse, shares can lose money over a lifetime. Scary charts after the jump.
Politics is back on the agenda for investors. Spanish and Italian bond and stock markets took a tumble, reacting to a spreading slush fund scandal in Spain’s ruling Popular party and rising support for former Italian prime minister Silvio Berlusconi. James Mackintosh, investment editor, asks if a retreat from the eurozone’s periphery will herald a shift in market paradigm
Should you buy when there’s blood in the streets?
Today sees the publication of Credit Suisse’s annual Global Investment Returns Yearbook, a mammoth piece of research into global long-run returns overseen by the London Business School academics Elroy Dimson, Paul Marsh and Mike Staunton. It is an invaluable resource, and this blog is likely to mine its contents for some days to come.
Revisions for this year help ram home one quick and spectacular lesson from history. Baron Nathan Rothschild is widely believed (wrongly, according to historian Niall Ferguson) to have said that you should “buy when there’s blood in the streets”.
Much of the time this advice works. Buying into Japan or Germany after the second world war would have worked out extremely well, and the greatest buying opportunities almost by definition come when it seems almost mad to buy.
But the aphorism is not infallible. This year, the academics tried to address their concern that their global stock market index suffered from “survivorship bias”. So they have recalculated them including three new countries that were not previously covered in their attempts to calculated the global equity risk premium: China, Russia and Austria. Adding these nations hugely changes the perception of long-term risk.
Let’s start in Russia. Any bold contrarians who decided in the late 19th century to bet on Tsarist Russia to outperform the US for the long-term, and held on even during the great political unrest of the attempted revolution of 1905, would for a long time have looked very clever.
The chart compares the St Petersburg stock exchange’s composite index performance with that of New York. After 1917, of course, the value of any equity investment in Russia was wiped out. 
This might appear to be an exceptional example. But it is not. China also had a revolution that led to the closing down of its stock market (and of capitalism for a while), and that happened within living memory. On the eve of the second world war, China’s returns looked very healthy. With the arrival of Mao, shares went to zero (and international investors have had a rough ride even since Chinese stock markets reopened).
Using the MSCI China index, covering stocks available to international investors, those who bought in 1993 have actually lost money. But Chinese stock markets have been recovering recently. And, deliciously for those who like historical ironies, the Shanghai Composite, the main domestic index, bottomed last year at 1949, the year of the revolution. Read more
Goldilocks eats the three bears
Goldilocks is back! Goldilocks was the famous “not too hot, not too cold” economy which under US Federal Reserve chairman Alan Greenspan was able to deliver rising shares without the Fed pouring cold porridge over asset prices in the form of rate hikes.
Today’s jobs data suggests exactly that can happen again, thanks to the oddity of the market and the central bank focusing on different measures. Read more
Those hoping for a “great rotation” from bonds to stocks might start by looking for smaller rotations within the equity market. James Mackintosh, investment editor, says the signs are far from uniformly supportive of the bigger rotation.
One extra chart, before the video: monthly total returns on the US benchmark 10-year Treasury bond per month. January saw a loss of 1.94 per cent, including coupon payments, which isn’t great. But it is slightly less than last March’s loss, or October 2011, and pales in comparison with some of the monthly losses in the past. As the chart shows, this is far from solid evidence of the bond bubble bursting. Read more
US GDP dropped in the fourth quarter of 2012 for the first time outside a recession since 1977, thanks to surprise cuts in defence spending. James Mackintosh, investment editor, finds some good signs in the data, but worries that if good news comes through on the economy would be bad news for investors.
Japan is the natural home of the bear, but its bull market from 2003-2007 looks very like the current US bull market. James Mackintosh, investment editor, looks at the parallels and considers what’s needed to keep the bulls running.
Rotate It All About
Has the Great Rotation already started? A couple of startling data points from the last month, covering treasury yields and flows into equity funds, certainly suggest so. But the picture is maddeningly unclear under closer examination.
First, there is the treasury bond market, as discussed in last week’s video with Mike Mackenzie, before 10-year yields had risen above 2 per cent (they’re back below today). Significant rises in yields would be an obvious sign of a rotation. You can see that video, and Mike’s emphatic argument that if the equity rally makes any sense at all then the rotation out of bonds must be coming, here:
Note that even with the brief move above 2 per cent, there is still a way to go before the inexorable downward trend in yields that has now lasted more than a quarter of a century is breached.
The other obvious data to look at concerns flows into equity mutual funds and exchange-traded funds. Until very recently, the trend to pull money from equities and transfer it to stocks has continued unabated. Stephane Deo of UBS discussed this with Ralph Atkins in the Note video available here:
Again there are signs of change, but not enough to make the call that the “Great Rotation” has already begun. Most startlingly, TrimTabs, which can publish flow data quickly because it uses algorithms to derive estimated flows from funds’ performance, found that inflows to all equity mutual funds and ETFs this month have already topped $55bn. That beats the previous monthly record, set ominously in February 2000 on the eve of the dotcom crash. Read more
| About this blog | Blog guide |
James Mackintosh is the Financial Times' Investment Editor, writing and presenting the daily Short View column and video. In 16 years at the FT his posts have included comment editor, motor industry editor and hedge funds correspondent, as well as spells in the Parliamentary lobby and Paris. He was the first reporter hired for FT.com, joining two weeks before it launched.
John Authers is the Financial Times' Senior Investment Columnist, writing the Saturday Long View and a regular Monday column. In a 22-year career at the FT, his previous posts have included global head of the Lex column, investment editor, US markets editor, Mexico City bureau chief and US banking correspondent. His latest book is The Fearful Rise of Markets. 
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