History is telling investors now is a time to be brave

Markets could well get worse before they get better but, for anyone looking to invest on a five-year basis, now is the time to start rotating into UK equities



Kevin Murphy
Co-head Global Value Team
Nick Kirrage
Co-head Global Value Team

“Happy families are all alike; every unhappy family is unhappy in its own way.”

Leo Tolstoy

As a very human tragedy unfolds across the world as a result of the Covid-19 pandemic, we have no wish to be seen as glib, here on The Value Perspective. It remains our job, however, to do the best we can by those who choose to entrust their money to us and, as we look to do so in the current environment, we find ourselves reminded of the above quote – the opening line from Anna Karenina.

This is because, to a degree, bull and bear markets mirror Tolstoy’s view of families. When markets are euphoric, they can feel very familiar, with investors generally acting in a similar fashion. When markets despair, however, they tend to do so in slightly different ways – be it the technology bubble bursting, say, global banking markets closing overnight or the worldwide spread of a new kind of virus.

That said, here on The Value Perspective, we see one significant similarity across bear markets and thus in the sort of investor behaviour we are seeing today. This is the very broad-based nature of the current sell-off, which is providing us with a lot of interesting ideas to look at – meaning we are spending almost all of our time either scrutinising companies’ reports and accounts or engaging with management teams.

Diversifying portfolio risk

One important point to take from this is that, for those who follow a value-oriented investment strategy, it is now a whole lot easier to diversify out the risk in a portfolio than it was at the start of the year. Yes, predictably cyclical-type businesses, such as airlines, are suffering in these markets – but so are traditionally more stable stocks, such as tobacco companies and utilities.

At this point, it is worth stressing that, in our riskiest portfolios, we will continue to be ‘the investor of last resort’. It is what we do and where we are offered the most attractive returns. In the downturn brought on by the 2008/09 global financial crisis, for example, we participated in rescue rights issues in the likes of Dixons, Inchcape and Taylor Wimpey and went on to make our investors many multiples of that original capital.

These were decent businesses with the wrong balance sheet at the wrong time but, we concluded, they were survivors and we should support them when no-one else would. Today, investors are generally not yet being compensated for taking that level of balance sheet or solvency risk but, while we wait for such opportunities, we can still pick up good companies at compelling prices and diversify the risk within our portfolios.

What if we are wrong?

That is what we are currently working to achieve and why we are arguing it is a compelling time for investors to consider increasing their exposure to UK equities. Still, such a view comes hand-in-hand with an important question: what if we are wrong? What if this is a bad time to buy? There is an old adage about bear markets – that if you look after the downside, the upside will look after itself – so let’s talk a bit about the downside.

First up, we do not know if we have seen the absolute bottom of the market – then again, nobody does. There could well be further to fall and, if so, how bad could it be? That is a hard thing to quantify, of course, but what we have done with the following chart is look back at the five worst times to buy our riskiest portfolio over the last 20 years and ask: if you did get the timing apocalyptically wrong, how badly were you hurt?


The short answer is, quite badly – but not for very long. The table on the right of the chart shows three pieces of information – the date of the market peak, the total fall in absolute terms – because that is what we believe investors really care about: how much money they actually lost rather than relative to, say, a stockmarket index – and the time it took to regain those falls and make new highs.

The falls were significant, as you can see, with reductions in people’s capital ranging from 20% to just over 40%. Those are clearly painful drawdowns and yet the longest time you would have been ‘underwater’ in any of these instances was around two and a half years. Again, that is a significant period but not so long in the context of the kind of time horizons equity investors should be factoring in as a matter of course.

It is also worth noting that none of those pre-fall peaks immediately followed the sort of 30%-plus correction we have seen in the stockmarket in recent weeks. As such, even if there is further to go, we would be hopeful buying good businesses at cheap prices today should make it far easier to protect on the downside so that we can eventually make it through to enjoy the upside.

What is the upside?

So what is the potential upside? Why are we asserting that, rather than running for the hills, now is the time to start thinking about increasing your equity exposure? It is because today is presenting a genuinely attractive opportunity to buy into equities – and not just in relative terms. This is no longer about value versus growth – well, not just about that – in absolute terms, the market is starting to look genuinely compelling.

Take a look at the following scatter chart, which shows data going all the way back to 1924. It plots both the dividend yield from the FTSE All-Share index – along the horizontal axis – and, along the vertical axis, the subsequent five-year return recorded after investing at these various yield points. As you can see, the All-Share currently yields in excess of 6% – a level only surpassed in two other market episodes.


One was between 1974 and 1976 when, in one of the great market crashes of all time, the index lost nearly three-quarters of its value. This period saw the collapse of the post-war Bretton Woods financial and commercial system, the Nixon shock and the US dollar devaluation – a complete firestorm that resulted in some of the extreme dots you can see to the righthand side of the above chart.

Extraordinary opportunity

The market eventually ended up yielding nearly 9.5% over the winter of 1974 – and the only other time that runs it close came immediately after the fall of France, in 1940, just months after the evacuation of the British Army off the beaches of Dunkirk. Brexit’s effect on the strength of sterling was as nothing compared with the threat posed by Adolf Hitler and, again, the market was utterly routed.

These were two very different times in history but, as we foreshadowed at the start, they do have one thing in common. In both instances, amid some of the worst fear and uncertainty they had experienced in a generation, investors were presented with an extraordinary buying opportunity before markets went on to rally hugely over the subsequent five years.

We do not know what the future holds today but we do know history is telling investors to be brave. As we have acknowledged, markets could well get worse before they get better but, if you are looking to invest on a five-year basis, now is the time to start rotating into UK equities. This is not the time to be trying to call the exact bottom of the market but it is – as we have reflected with our own money in recent weeks, here on The Value Perspective – the time to start being brave.


Kevin Murphy
Co-head Global Value Team
Nick Kirrage
Co-head Global Value Team


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