HAMISH MCRAE: Queue here for the market rally

So what should we do with our savings? There is clear demoralization among professional investment strategists, as most of them failed to foresee the vicious nature of most markets last year.

If you were really, really wrong last year, it’s hard to look at the next few months with much courage. In the US, a typical view is that equities must fall further before recovery can take place.

Here in the UK, the noise about recession, strikes and inflation drowns out the more encouraging signals, so when a company reports that business is actually doing quite well, as Next did last week, it comes as a surprise.

Shares are up more than 12 percent in the past five days, a nice reward for investors who ignored the consensus.

There are two questions for investors. When will the mood change? And where are the most reliable ways to profit if that’s the case?

To the first there is a very simple answer: we cannot know, but it is always better to be too early than too late.

Markets go in cycles, but timing is impossible. The analogy I find most useful is to imagine trying to catch a rural bus that comes about every hour, but is sometimes a little early and sometimes a little late.

It is much better to show up ten minutes early, even if it means standing in the rain, than to arrive on the dot of the hour only to find that the bus has left a bit early and you have to wait another hour on the next .

It’s rare for stock prices to fall at a two-year pace, but it does happen. So while the markets are likely to finish higher in 2023 than they are now, this could be one of those cases where the next bus – the next bull market – arrives late, in this case in 2024. But it’s not worth it take the risk of missing it.

And the best ways to take advantage of the return to a positive outlook? It is difficult, and whatever one does must depend on their individual circumstances. But the simple fact is that equities have historically provided better real returns than fixed-rate alternatives, especially government bonds.

The most recent Barclays Equity Gilt Study, dating back to 1899, shows that UK equities have returned 4.9 percent in real terms over those 122 years. Gilts, on the other hand, yielded 1.3 percent and cash only 0.6 percent. That was until the end of 2021, so the numbers will be slightly worse now, but not radically.

Over the past 20 years, the gap has narrowed: equities yielded 2.9 percent, and government bonds 2.4 percent – ​​cash was minus 1.1 percent. But over the past two decades, the FTSE 100 index has moved sideways, while gilts have benefited from a long decline in interest rates, so that a few years ago the yield on ten-year gilts was below 0.2%. That was the lowest level since the establishment of the Bank of England in 1694, and no doubt long before that. To say it was abnormal is an understatement. You can understand why I don’t think it’s a good idea to favor equities.

Which? Reason says UK residents should consider investing some money abroad. The UK accounts for about 3 percent of the global economy, so it should make sense to invest some money in the other 97 percent.

Coincidentally, the large companies represented in the FTSE 100 index earn more than three-quarters of their income outside the UK, either from export sales or from the activities of foreign subsidiaries. So an investment in a cross-section of the Footsie companies is a pound sterling bet on the global economy.

But the index also tends towards “old” companies, such as finance, oil and gas, mining, retail, and so on. There is relatively little exposure to big tech, and not to the now rather battered, but still huge tech giants of the US west coast.

At some point, those giants, Apple, Microsoft, Amazon and so on, will come back into fashion.

So while the UK offers more value than the US – the Footsie has a P/E ratio of around 14, while the S&P 500 is at 20 – caution says people should also invest some money in solid US companies. There are easy ways in, through UK-based investment funds. A similar argument, that people should spread risk, applies to investments in Europe and Japan.

So no easy answers, just one simple message: don’t miss that next bus – even if it means waiting in the rain for a long time.

UK residents must invest some of their money abroad.