February, when a new year really brightens up and gets going.
Friends emerge from post-Christmas hibernation as they abandon their resolutions to never drink or go out again.
The sun shows itself again above chilly blue skies. And the surest sign of new life – the 2-for-1 Valentine meal promos at M&S and Waitrose – begin to poke their heads above the marketing noise, signalling the coming of spring.
At the breakdown
The kick-off of the Six Nations rugby tournament is usually a cheery seasonal marker for me, too.
But not this year.
You see for most of the past decade, my team – Wales – were almost always contenders to win the championship.
But this year we lost our first two games.
We lost to Scotland! A nation that – no offence – has not been competitive since the last century.
Wales versus Scotland used to sit alongside the Italian fixture as a chance to relax and watch a game without the obstruction of your fingers over your eyes.
Not any more. Scotland were fabulous at Murrayfield this year. They blew Wales out of the park. Come back January blues. All is forgiven.
Turnover
When Wales was in its pomp and Scotland on its uppers, it was hard to imagine anything different.
But that was to be ignorant of history.
Economists call this “recency bias” – our human tendency to overweight the present evidence and underplay what came before.
Wales have played 129 matches against Scotland since 1883. And while Wales has the edge with 75 wins, Scotland’s 51 victories are hardly to be sniffed at.
Unless you believed something had fundamentally changed forever in either Welsh or Scottish rugby, it was complacent to imagine men dressed as daffodils would always provide the joyful cut shots in TV broadcasts, to be contrasted with crying fans in kilts.
There was always likely to be a turnaround, and the run of things roughly restored. Economists have a term for that too: reversion to the mean.
Caught offside
Shocking though it may be to those of us for whom rucking and mauling is a feature of a fun Saturday rather than an encounter with a dangerous dog, economic wonks didn’t come up with this stuff to describe the fortunes of sports teams.
Rather as investors, we see the impact of these forces in the stock market all the time.
Excessively high margins tend to revert to the average. Competition chips away at a company’s earnings edge.
Investors who were overly biased in their assessments of recent super-high earners then eventually find out that they’re shareholders in a rather average company after all.
A great example came with the lockdown boom and re-opening bust in the US tech sector.
Company CEOs and investors alike thought the future had been pulled forward, as we shopped, worked, and even socialised from our homes while the virus raged around.
Revenues at firms in the sweet spot like Zoom and Peloton skyrocketed.
Prices of city centre apartments slumped, as homes in the country boomed to reflect the reality of life under Covid restrictions.
But it all proved to be recency bias at work.
As soon as they could, most people were out and about again. The share prices of lockdown winners cratered.
And city centre flats are now doing better in price terms than far-flung seaside retreats.
Or remember when the oil price briefly fell below $0 a barrel in early 2020? That helped catalyse a thousand obituaries for Big Oil, egged on by the spreading of an ESG agenda that rightly enough is pressuring society to reduce its reliance on fossil fuels.
Shares in Shell and BP steadily fell all year. At best their future looked like one of managed decline.
But then societies reopening and the woeful invasion of Ukraine by Russia changed everything. Demand and the oil price recovered. Left-for-dead oil stocks have more than doubled off their lows.
In the scrum
Whether you’re an investor in tracker funds or a stock picker, you could do worse than tape a Post-it note to your monitor as a reminder:
‘Things change’.
Bear markets do not last forever – no more than bull markets.
Companies can certainly fall from grace, but it’s rare for broad sectors to do so. Far more often profit margins rise and fall, taking share prices with them as investors overplay recent evidence.
What looks a certainty right now that could seem a passing phase in the future?
Inflation – and concomitant interest rate rises – look like strong candidates to me.
It’s possible – though in my opinion very unlikely– that we’re in the foothills of an inflationary spiral that persists for years.
But it’s far likelier that inflation will revert to the mean and interest rates soon top out.
Long-term investors would be wise to invest accordingly.
Or, on a stock-specific basis, squint a little and the big tech giants that have dominated our lives – and global market returns – for years suddenly look vulnerable.
It was almost impossible to imagine Alphabet’s money-printing search business being challenged until the ChatGPT chatbot arrived in November. Now it seems more than feasible.
Elsewhere shares in Meta – the owner of Facebook – have emerged from a death swoon, but the company’s vast bet on investing in the Metaverse is still gobbling up its attention and resources.
And yet it would be very unusual for the winner of one paradigm shift to capture the next. CEO Mark Zuckerberg is well aware of this, hence why he’s throwing money at the problem. But there’s no guarantee he’ll succeed.
Meanwhile, TikTok continues to gather attention that would otherwise go to Meta’s Instagram.
Closer to home, London-listed REITs like British Land, Landsec, and Shaftesbury languish on 30-40% discounts to the value of their properties.
With office occupancy at less than 35% in terms of staff at their desks, it’s easy to understand why.
Yet that number does continue to steadily climb, even as new development grinds to a halt, curbing future capacity.
Eventually, these two forces should dovetail to shore up valuations.
On the blindside
Or perhaps they won’t? Maybe we’ll never go back to our 2019 working patterns (though even then property assets might hold their value as flat conversions, say, or as hubs for e-commerce).
The sting in the tail is we can’t just buy whatever has suffered a punishment beaten at the hands of the market, reasoning it has to bounce back
Capitalism and progress don’t work that way.
Wales and Scotland will play many more games in the future. Their fortunes will wax and wane.
But a horseshoe tycoon in the 19th Century was guaranteed a rotten 20th, unless they made an unlikely pivot to tyres.
Everything changes, certainly, but we can’t be sure exactly when or how. That is what makes investing such a challenge – and supporting Wales such a trial right now!
