Shares made a great start to 2013, investors are switching from bonds to equities and key stock market indices have been back to pre-crisis levels. It is time for buyers to beware.
While equities remain the most suitable investment for less sophisticated private investors, there is no argument for piling in willy nilly. We have been building up to the classic scenario where punters are sucked in, get their fingers burnt and resolve to stay well clear of shares until a few years later they are tempted into making the same mistakes all over again.
Changes to the way that financial advisers are paid mean it is all the more important that private investors take control of their own cash. No longer will advisers be paid out of commission from the products that they recommend. Now they will have to charge upfront and monthly fees and many of their clients, shocked to discover how much decent advice costs, will drop out altogether.
It will be a pity if that happens, as most will end up with surplus cash rotting away in underperforming bank accounts. The answer is a cautious approach to equity investing.
After a particularly strong January, the FTSE 100 hardly paused for breath before topping 6,300 points and reaching levels last seen just as the financial crisis was breaking. While the worst of the financial crisis is probably over, we can hardly say that the UK, or Europe for that matter, has fully recovered.
We in Britain have bumped along in a recession that has now stretched for five years and could well last for another five before we recover to pre-crisis GDP levels. With wages stagnant and inflation refusing to come under control, real income is on average back to 2003 levels – a year when the FTSE 100 dipped below 3,000 points and struggled to claw back to 4,000.
Eurozone countries are still struggling with their respective national debts, Germany apart, and the zone as a whole slipped back into recession in the final quarter of 2012, severely restricting our own hopes for economic growth. Exporters are only slowly adjusting to seeking better markets elsewhere.
This is not an argument for being gloomy, just for being realistic.
The shinier side of the coin is that there are still shares that are undervalued. Companies making solid progress and offering a yield of 4–6% are well worth looking at. Even 3% is not to be sneezed at. It is true that many have already seen their share prices rise but they still offer excellent value.
Investment experts are now talking about the ‘great rotation’ in which investors sell government and corporate bonds and buy shares, which if it happens will certainly boost share prices and add to the panic rush into shares. The big question, though, is why private investors were into bonds in the first place. Shares are simpler to understand, steadier in performance and offer better rewards in the long term.
Those left holding overpriced bonds will find themselves drawing a poor rate of interest while seeing their capital values fall just at the moment that it becomes increasingly expensive to switch into equities.