Review of the past decade

“Your clothes… give them to me, now” (The Terminator – 1984)

When future generations are told of this decade, what will they be told? Maybe our future robot overlords will teach this as the moment we ceased to be worthy of running our own affairs? Nonetheless, we regularly warn against the idea that we are living through a kink in our times. Such ideas usually speak more of our innate desire to feel special rather than anything more substantial. We explore to what extent we can still make this argument amidst a seemingly tumultuous decade and what this means for investors. 

The death of liberal democracy?

The death knell for liberal democracy is being rung by commentators the world over. Authoritarian leadership, sold specifically on the idea that checks on executive power are for the weak and indecisive, seems to be making a return. This surely can’t end well?

However, the counterargument would be that the conflict between political and legal power is the normal, and healthy, state of any liberal democracy. It was designed exactly for the purpose of managing such conflict, and keeping it this side of violence. Put another way, how can we ever know how effective our checks and balances are if we never put them to the test. For much of the western world, these checks on executive power have proven themselves reasonably robust so far.

The tests are not done with yet of course. However, the point here is that we should be wary of those who seem to assume that the world is now on a now predestined march towards authoritarianism and all that has historically come with it. 

Secular stagnation, Japanisation and other economic diseases

Another human tendency is towards hypochondria. We have all been guilty of diagnosing a bog standard hangover as something more exotic or chronic. Or maybe that’s just me? Anyway, there may be an element of this in how many commentators and talking heads have approached the aftermath of the mesmerisingly destructive recession of a little over a decade ago (Figure 1). Economists have clambered over each other to diagnose the economy’s structural ills – an ageing population (Figure 2), slowing productivity growth, etc. Most of these theories not only describe why we are in economic trouble now, but also why we are unlikely to ever recover. Such ideas have certainly seeped into investors’ thinking too. The world economy has become guilty until proven innocent, as perhaps the level of interest rates the world over pays some testament to. A noisy political foreground has only furthered this sense of eternal stagnation or, worse, inexorable decline.

It's okay to see these headwinds as challenges to be overcome. But to take them as a definitive forecast of the future lacks imagination.

For example, an ageing population need not be the dominant factor to consider when looking to the future. Perhaps the ongoing changes in the physical demands put on us mean we will work for longer and save for less. We are living longer, healthier lives after all. Discarding the older parts of the population as lacking in productive potential and risk appetite could be as mistaken as those who imagined that mobile phones had no future because of their battery life and range back in the 90s.

When it comes to productivity, it is vital to remember that one wave of productivity growth tends to bear scant resemblance to the next (Figure 3). How can it? We cannot predict what will be invented next year, let alone in 10 years’ time.

As an aside, it would also be a mistake to assume that such game-changing innovation has to centre around superstar areas such as Artificial Intelligence. The transformative inventions of the past have often been a little less heralded - from the shipping container to the humble spreadsheet.

An amazing decade for investors?

One of the startling things of the last decade has been the returns that have accrued to those who ignored the doomsayers and stayed invested in the stock market. Unabashed, the doomsayers now argue that in ignoring their wisdom, the investment community pushed stock valuations to dangerously exuberant levels, leaving markets still on the cusp of a stomach churning correction. Armageddon has simply been delayed, never cancelled. 

Again, there is nuance here that’s worth keeping in mind. Yes, high stock valuations tend to be followed by lower returns (if you pay a higher price for an asset, your returns should be lower, all things constant) (Figure 4). However, they do not mean a sharp correction is imminent. Valuations can be structurally higher today for a myriad of reasons: lower interest rates, changes in investor behaviour, lower trading costs, etc (Figure 5). At current valuations, we think that stock returns for the next decade may plausibly be lower than the previous one. But to say that stock markets must reprice lower because they are more expensive today is likely mistaken.

Conclusion

Putting it altogether, we would urge investors to remember that we can know much less about the future than many argue. Extrapolation is the only tool that many seem willing to bring to bear in this fight, but the future is rarely so obliging. The world is not without problems of course, but a recourse to gloom remains as inappropriate as it ever was.

We are learning to be ever warier of our news. The media and other talking heads have long cottoned on to the fact that doom tends to sell better than the prosaic truth. There is evidence to show that there has even been an acceleration in this trend, since the advent of social media has added further heat in the competition for our attention[1].

The point for investors is that investing is still not about the ability to avoid all the bad stuff that lies in our future, recessions and all. That simply cannot be reliably achieved. But this cycle is a nice reminder that you don’t have to. The returns of the last decade illustrate nicely that the bad stuff is usually outweighed by the quieter good stuff – the continuing ability of humankind to find more ways to do more with less.

[1] In experts we trust? - Minouche Shafik, Bank of England (Feb 2017)

Learn about Barclays Wealth Management, the affluent and high net worth service provider for Barclays UK.

or

Find out about Smart Investor, the direct investing service from Barclays designed to help retail customers to achieve their investment goals.

*This article is for information purposes only. It is not intended as a product offer or investment advice.