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Long Live the Equity Markets

18 November 2020

By Adam Lloyd

There have been many headlines over the years proclaiming “The Death of Equities”. The most famous perhaps being BusinessWeek, the originator of that very headline in August 1979. Had you taken that view you would have thought yourself very clever at least for the next three years, before missing out on the longest bull-run in history. At the same time, the equity market faithful would see their investment pots soar by as much as sevenfold up to the present day.

Along the way there have been significant falls or crashes and they have all been preceded by historic highs. The lesson is that stocks can go down just as easily as they go up and the higher they go the harder they fall. The other lesson, and the most important one, is that the next peek has always been higher than the last one. The strength or otherwise of equity markets can only be fairly assessed through a full economic cycle; from boom to bust and back to boom again.

Since the 2008 financial crisis when the world’s banking system was close to collapse and many, if not all, of the banks were technically insolvent it was the equity markets that came to the rescue. The coordinated actions of the central banks stopped the banking system from failing altogether but without the equity markets and their supply new funding for businesses the recession would have lasted longer and been much deeper, with terrible consequences for us all. The equity markets were often the only place companies could go to recapitalise; in many cases this was money just to keep them going. Equity markets have always been willing to invest when the banks and the debt markets are nowhere to be seen.

The ultra-low interest rates that have persisted since the banking crisis have been good news for equities. With bond yields so low, the search for decent investment returns has driven more money to alternatives such as fine art, fine wine, precious metals and even classic cars. But the biggest beneficiary has been the equity markets and this fact has not been lost on the general public.

The attraction of investing directly in equities has continued to rise since 2008 and the pandemic crash in March this year has done nothing to stop it. Unlike previous stock market crashes that have tended to scare smaller investors away, this time it has been different.  A heady mix of more online access, more and better trading platforms and more working from home have combined to make retail investors even more active. The storming share price performance of the FANGs (Facebook, Amazon, Netflix and Google) has also played its part.

This year has also seen the emergence of PrimaryBid, a new platform that allows retail investors to access new share offers, something that has for years been the sole preserve of the big institutions. This will be a real game changer for equity markets as it gives everyone the opportunity to take a more proactive role in the management of their finances. This is clearly good news for companies as it enables them to access an even bigger pool of capital but the real difference is that, for the first time, it allows retail investors to participate on equal terms with institutional investors. However you save for the future the increasing democratisation of the equity markets will benefit all investors through the provision of more and better dealing platforms, lower dealing costs and more choice.

Equity markets have been funding businesses and driving economies for centuries and their impending demise has always been overstated. Politicians, accountants and actuaries have all had a go at killing them off one way or another, usually when they are booming, but they keep coming back. If you want your investments to beat inflation and respond to changes in the economy, technology and the environment you can’t beat the equity markets. Bonds appear to be the safe option, which is why actuaries like them, but for long term returns in a changing world, equities will always be the better choice.