Jeff Prestridge, the long-time personal finance editor of the Mail on Sunday, has featured our analysis of the long-term returns offered by equities in this Sunday’s newspaper. We were happy to engage with him because we think it is an important and powerful message to get out at this time of uncertainty and concern.
Our conviction is to invest in the stocks of companies that have quality and value for the long-term. When uncertainty is high and markets sell off as they have this year, it can be challenging to focus on the fundamental strength of companies, their sustainable competitive advantage and their potential for value creation.
We invest in companies not markets but it is a fact that equities as an asset class have performed strongly over decades and that they are the most liquid and most accessible way to preserve and increase the real value of assets over the long-term through inflation, geopolitical and macroeconomic uncertainty, economic cycles and other issues.
Our analysis of the long-term investment returns offered by equities shows that it is hard to find ten year periods in which investors did not generate returns of 8% per annum or more from investing in major markets.
We had an opportunity to share it with Jeff and hope that his article will help people to understand the importance of investing with a consistent and long-term approach, regardless of whether it is selecting companies as we do or investing in markets as a whole, with all the benefits and drawbacks that come with investing in index funds or ETFs.
You can read the article on the Daily Mail website by following the link here.
Buffeted by the pandemic and Russia’s invasion of Ukraine, the US and European economies have been benefitting from strong demand for goods and services. However, at the same time, they are struggling with supply constraints for resources and labour and high energy prices. These constraints are the cause of the high inflation we are experiencing and have led the US Federal Reserve and other central banks to raise rates rapidly this year.
Growth, inflation and interest rate increases go hand in hand. In January 2020, just before the pandemic, US 10-year treasury rates were at 1.8%. Today they are at 3.9%.
Of course there is an impact from rising rates on consumers, corporates and investors. The sell-off in markets reflects those concerns. However, not all consumers are overleveraged or are facing increases in floating rate mortgages, not every country is reliant on imported natural gas at prices that have increased fourfold or more, not every corporate is overleveraged or reliant on public or private markets for their funding, and not every investor has invested in government bonds which they have leveraged through derivatives which require large amounts of collateral to be posted that cannot be raised through asset sales at a time of market stress as UK pension funds have. Just how damaging the impact will be on consumers in the US and Europe will become apparent by the end of the year.
However, as supply responds, bottlenecks ease, people re-enter the workforce, oil and gas prices level out or decline and as comparisons annualize, and as we hope for a peaceful resolution of the war in Ukraine, the picture could change quickly. A US economy with interest rates of 4.5%, inflation of 2-4% and 0-2% real rates is normal and nothing to worry about.
Many companies continue to have strong demand, especially in higher end consumer products, healthcare and life sciences and industrials. Our overview of our World Stars Global Equities strategy below provides several examples. We are invested in businesses that continue to grow, that have the innovation and competitive advantage to increase their prices to offset inflation, that have the scale and expertise to mitigate the cost increases in their purchasing and that have the financial strength to keep investing in their businesses, to buy others or to buy back shares.
It is time for investors to cheer up. One of our favourite Warren Buffett quotes is that it is better to buy a great company at a good price than a good company at a great price. Today’s share prices mean we can buy great companies at great prices which we think offer great opportunities for long-term investors.