HAMISH MCRAE: A welcome return to value is a real comfort for investors

The clouds have lifted a little. For the UK, they have risen as markets are now stable, with 10-year Treasury yields back below 3.5 percent and the pound stable around $1.16.

There will be a mountain ahead of us to bring the UK budget deficit back to sustainable levels and we will find out more on that on 17 November. Next week we will get the new Bank of England forecast for the economy and we will also get an increase in its base rate. But the cost of paying off the government debt has at least come down a bit, and that will help contain the rise in mortgage rates. So all in all a relief.

But the shift that is taking place is global. Suddenly, the financial world is racing back to common sense valuations. The journey has been cruel, for much wealth has been swept away.

But actually that wealth was not really there in a sustainable way. We are back at reasonable values ​​on both the bond markets and equities. They may be too high or too low, but you can make a good argument to support the valuation.

Go back to the beginning of this year, and it was virtually impossible to justify gilts yielding less than 1 percent, or for that matter Facebook — or Meta as it calls itself now — worth $1 trillion. It’s now worth about $266 billion, still huge, but a six-year low.

Last week there were two huge moves in the markets. In bonds, there was a clear recovery of confidence. In equities, it was a huge loss of confidence in many, not all, high-tech sectors.

On the bond side, the decline in yields we saw here in the UK was part of a broader shift. The corresponding yields on US Treasuries, German Bunds and so on all fell. The 10-year yield in the US, which has risen sharply this year, has fallen below 4 percent. Why? Well, I think the markets are catching a glimpse of some sort of turning point in both inflation and short-term interest rates next year.

They know that the Fed will raise interest rates this week, as will the Bank of England. They saw the European Central Bank raise them last week. They know that there is more to come, because that is what the central banks are signaling.

But they also believe that the spike in short-term yields may be lower than they thought even a few weeks ago, justifying scaling back long-term yields. They may be wrong in relying on central banks’ determination to crush inflation, and current yields will rise again, but they are making a rational decision.

Reason is also making a comeback in the stock markets, and with a bang. The main victims are high-tech companies that somehow over-promised to grow. Meta, mentioned above, is a classic example of a high-tech company that, fair or wrong, is seen as an ex-growth company.

But this revaluation extended to Amazon, down 40 percent so far this year, and to Microsoft, down more than 30 percent since late December. They’re still great companies, make no mistake about it, but they were clearly overvalued companies. On the other hand, Apple is seen as justifying a meaty valuation and after strong trading on Friday, it is down just 14 percent this year. The market is trying to do what it should always do: forget fashion, find out where there is solid and profitable growth, and put a price tag on that.

I have no idea whether these current values ​​mark the bottom of this bear market or not, but I’m sure they are no longer absurdly exaggerated. Indeed, if you shift the focus from high-tech America to the more mundane markets this side of the Atlantic, it’s much easier to see value.

In the long term, fossil fuels may be phased out faster than investors currently expect, but the fact is that since January Shell shares are up 42 percent and BP 35 percent.

The dividend yield on the FTSE100 index is just 4 percent. There could be a windfall tax on energy companies next month, and banks are lining up for one-time taxes when the government is strapped for cash, but both sectors are now delivering solid returns.

It looks like dividends from the Footsie companies will be around £85bn this year, quite close to their 2018 peak of just under £90bn.

What’s next, aside from the small matter of the budget? I hope the recession is pretty much ‘in the market’ by next year, but a lot of wealth has been destroyed and more damage could come. But at least the madness is over – that’s a real consolation for investors.