The festive case for faith-based investing
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
It’s hardly Christopher Hitchens debating Rabbi Shmuley Boteach. But around this time of year, online atheists and chatroom believers love to thrash out an age-old debate: “Why God and not Santa?”
That adult Homo sapiens keep faith in the former and not the latter doesn’t seem inconsistent to me. A child soon questions how their bike could fit down a chimney, whereas God offers life after death. It just makes more sense.
I’m no psychologist or theologian, but as an investor I’m increasingly of the view that mistaking temporary biases for deeper beliefs — or vice versa — is the main reason I often screw up.
Take one of the bigger market surprises of the year: the 23 per cent leap in US equities. I ignored the sceptics and pressed buy in March. Losing heart in September, however, has cost me another 6 per cent so far.
My life-long issue with the American stocks is how expensive they mostly are. In particular the large and best performing ones. Despite prices soaring ever higher, I expected investors to one day outgrow them. Just as Santa cannot possibly visit every home in one night, investors would eventually see that the S&P 500’s cyclically adjusted price/earnings ratio is double its long-run average. They would soon roll their eyes at Tesla, rather than sit on Elon’s knee.
But what if devotion to US equities ran deeper? Maybe ownership is more akin to religion than a temporary delusion — with all the trappings of joy and social cohesion that institutionalised belief systems offer.
In which case, the likes of me debunking the miracles of adjusted earnings and capitalised R&D costs falls on deaf ears. To believers, the numbers are glorious.
That markets can be supported by nothing except divine will is not as happy-clappy as it sounds. Cash is made of out paper. Gold has little use beyond jewellery and circumventing sanctions, yet prices reached new highs recently.
My underestimating the power of belief has also resulted in some terrible economic calls. I have always trusted my fellow investors to realise one day that governments cannot overspend forever — the equivalent of realising that flying reindeer don’t exist.
But as with sky-high equities, no one seems to care that six of the world’s G7 nations will have net debt positions in excess of their annual outputs in 2025, according to IMF forecasts. Indeed fiscal tightening is heresy these days.
Surely upon growing-up, I thought, investors would see that Italy and Spain are not Germany, nor is Mexico America — and that, therefore, lower-grade sovereign bonds should be priced as such. Wrong. Spreads have been incomprehensibly tight for a decade. I didn’t forecast the narrowing over the past 18 months either.
For some reason folks believe governments will never go bust. Japan has had gross liabilities of more than double its annual output for more than a decade, so why worry? Better yet, such conviction is self-fulfilling — keeping bond markets and thus the interest paid on debt stable.
However, my Santa-centric view of the world has caused me the most damage when it comes to real estate. I have been predicting a collapse in house prices since university and continue to rent shoeboxes for hellish sums. Friends pray for me and pass a hat.
Yet I find their commitment baffling. No matter how bubbly the metric, the ascension of property is a given. Knight Frank reckons prices will rise an average 2.5 per cent next year across 25 cities worldwide, despite “higher for longer” borrowing costs. It pays to love with all your heart, it seems. Only we atheists or apostates suffer the consequences.
How I wish to replace Santa with a less cynical approach. But as my 9- and 11-year-old girls know when they watch their younger siblings put milk and biscuits by the hearth, there is no return to innocence once lost.
That said, even strongly held investment beliefs come under pressure from time to time — as anyone who has managed money during a crisis knows. But cracking completely is rare and hard to predict. I expected the dotcom bust to end insane tech overvaluations. Few banks changed after the financial crisis.
Could 2024 be Santa’s revenge? The rally in US stocks this year, for example, was entirely due to expanding multiples rather than better earnings — which grew only 0.6 per cent annualised versus an average of around 8 per cent over the past 10 years, according to FactSet data.
This means that the S&P 500 relies to an even greater extent on hope rather than fundamentals. More ominous for the bond and equity faithful, perhaps, was the jump in overnight lending rates this month, often a sign of agnosticism in funding markets.
Meanwhile, as UK homeowners genuflected after Wednesday’s better than expected 1.2 per cent year-on-year decline in average prices for October, most ignored the fact it was the steepest drop for more than a decade.
See what I’m talking about? We heathens can’t help ourselves. Always focusing on the negative and thinking we’re smart because we know Santa isn’t real — but refusing to replace him with anything else.
At this wonderful time of year, therefore, please don’t be like us, dear reader. The fate of markets and the global economy depends on you believing. Merry Christmas everyone!
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