Investing in the stock market today demands a sanguine view of the outlook for earnings

Whatever happened to Tina - aka ‘there is no alternative’?

For years she was wheeled out in defence of stock market investing. Her pitch was simple. With interest rates close to zero and shares still out of favour in a sluggish post-financial-crisis world, the case for buying stocks was irrefutable. On valuation grounds there was no competition, particularly between equities and bonds.

A decade ago, with shares trading on a multiple of earnings in the low teens, the effective yield offered by shares (the upside-down view of that ratio) was 7pc or more. That’s what the average company was generating on the money you invested, some of which was paid out as a dividend and the rest reinvested into the business. Either way you could benefit.

The yield on Treasuries or Gilts, by contrast, was close to nothing at all. Even if, instead, you took the risk of lending to a company, accepting that it was more likely than a developed world government to renege on its promises, the returns were unappealing. You were probably only receiving half the return offered by the same company’s shares. The not so technical term for that comparative arithmetic is ‘a no-brainer’ - for years there has simply been no good reason not to favour shares over bonds.

Same story for cash. There were some good reasons for holding it in a portfolio, but none related to the return it offered investors. Cash was dry powder, to use when the market had one of its periodic swoons. It also couldn’t fall in nominal terms, which was attractive in the aftermath of the 2007-9 bear market. But it’s yield was basically zilch. In real terms, even when inflation was much lower than it is today, it was negative.

Even traditionally high-yielding asset classes like property fell off the income seeker’s radar as investors chased returns. The yields on commercial real estate were pushed to levels that blithely disregarded the realities of occasionally empty offices and shops, ongoing maintenance costs, illiquidity and obsolescence.

But this year Tina has gone into hiding

For the first time in years, many investment options look, in the short run anyway, to be very similar. The earnings yields on cash, bonds, property and shares have coalesced around 5pc, give or take. Regardless of which of these asset classes you choose to invest in, it will take roughly 20 years to earn back your investment. Suddenly there are no ‘no-brainers’. A case can be made for everything, or for nothing. And many of those options will involve money shifting out of the stock market.

The case for bonds, for example, is unusually compelling right now, and becoming more so as the peak in interest rates gets ever higher and later than we hoped. It is hard to believe that central banks are not going to overdo it this year in their desire not to let inflation run out of control on their watch. The likelihood is growing that investors can lock in a high initial yield and then enjoy a capital gain as rates, inevitably, come down again when the economy stalls.

For more risk averse investors, the attraction of money market funds is also strong. These portfolios of very short-term bonds and bills, essentially slightly higher-yielding cash, have long been seen as a short-term home for money in search of a better opportunity. Now they look to have merit as a longer-term investment too.

Meanwhile, the case for investing in nothing is made by spiralling mortgages. This week, the two-year fix tipped over the 6pc hurdle here in the UK. If you still have a loan outstanding on your house, you have to be optimistic about your investing skills to think that it is not just as sensible to use any spare cash to pay down what you owe.

The balancing out of the short-term income returns from a broad range of assets has concentrated investors’ minds on both the risks they are taking and what they are trying to achieve with their investments.

Investing in the stock market today demands a sanguine view of the outlook for earnings. The consensus view that profits will fall only slightly this year before bouncing back strongly in 2024 relies on heroic assumptions about whether we can achieve a soft landing. The odds on a recession have increased significantly. It’s not clear that the uncertainty is fully priced in.

When it comes to real estate, too, there is a long and growing list of reasons to prefer the similar yields but lower risks of government bonds. No tenant default, no onerous environmental regulation. Instead, a nice insurance policy against things panning out worse than hoped for. All wrapped up in a nice, easy to trade package with the explicit backing of Uncle Sam. At long last there is an alternative to risky assets. Tina isn’t the only available date.

But, depending on your circumstances, she can still make a strong case. A similar yield in the short term does not mean that shares won’t continue to deliver superior total returns for anyone with a longer-term investment horizon. The right kind of property still has a place in a diversified portfolio. 

And it’s not just a matter of performance. A balance of equity and fixed income is still likely to deliver smoother returns over time. According to research from Vanguard stretching back to 1977, last year was unique in seeing falls for both shares and bonds in a single calendar year. In most other years, either both have risen or a gain for one has offset a loss for the other.

The reappearance of alternatives may complicate the job of an investor. But it is a nicer problem to have than investing in shares because you have no choice.

Tom Stevenson is an investment director at Fidelity International. The views are his own.