Many investors are currently attracted by the perceived safety of government bonds (e.g. US, UK, Germany, Japan), which have had a great run in recent years and are now more expensive than at any time in the past. It’s a bit like buying property in Ireland in 2005/6. Unfortunately, there is no such thing as a sure thing, as the following tale illustrates.
Once upon a time, a man arrived into a village and announced that he would buy monkeys for $10. The villagers, seeing that there were many monkeys, went out into the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish and villagers stopped catching them, he announced that he would now buy them for $20. This encouraged the villagers and they started catching monkeys again. Soon the supply decreased even further and people started going back to their farms. The price was increased to $25 and the supply of monkeys became so scarce that it was difficult to spot a monkey never mind catch one. The man then announced that he would buy monkeys at $50! However, since he had to go to the city on business, he informed them that his assistant would act on his behalf. In his absence, the assistant said to the villagers, “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and, when the man comes back you can sell them to him for $50.” The villagers gathered up all their savings and bought all the monkeys. They never saw the man or his assistant ever again.
Investors willing to take a long-term view should favour international stocks over bonds. This may not be a popular view, given that the last decade has been tough for equity investors but such periods of underperformance are invariably followed by periods of out performance. For example, the last time the markets emerged from such a barren period (1966 to 1982), the Dow Jones Industrial Average advanced from 875 points in early 1982 to over 11,500 points by late 1999.
In short, although it may not feel like it, this is a time of great opportunity. Individual stocks and markets generally are exceptionally good value. Taking a long-term view, there are many reasons to be bullish, including:
Companies have restructured and are fighting fit again;
The economic environment is supportive – interest rates and inflation are low;
The world economy is expected to grow by over three per cent in both 2013 and 2014 – mainly driven by growth in Asia;
Barriers to world trade are coming down and large companies can now sell their products and services in almost any country.
The seeds of a new bull market are being sown. It may be a few years before it gathers momentum, but in the meantime you can invest in blue chip stocks paying generous dividends, while you wait for the good times.
The sad part is that most investors will miss the boat. They are put off by the many uncertainties facing the world economy, including the slowdown in global economic activity, concerns about the euro, the European sovereign debt crisis etc. But this has always been the way; the best opportunities occur at times of greatest uncertainty.