That went very well on the stock markets again this week. Despite interest rate hikes from two of the world’s major central banks, stock prices are continuing their good start to 2023. Amsterdam is now almost 10 percent higher than at the end of 2022, and this is the case on most stock exchanges.
This is remarkable: a period of economic recession and inflation – ‘stagflation’ – usually has a bad effect on the value of shares. Interest rates are going up, and so are the financing costs of companies. The economy is collapsing, and so is the sales market. But investors, as it is called, look through this one double whammy to. The sun is apparently shining again later in the year.
There are warnings. Two weeks ago, Nicolai Tangen, the head of the Norwegian sovereign wealth fund with more than 1,200 billion euros in investments, warned of a long period of underperformance on the stock markets. Then Ruchir Sharma, the boss of mega investor Rockefeller International, pointed out. points out that the combination of deglobalization and aging may lead to a combination of low growth and high inflation that could last for a very long time.
Now economic pessimism is an unpunished activity: if you are proven wrong, then the world will be fine and no one will blame you. That explains why prophets of doom last so long. But still: we sometimes forget that there have been long periods when share prices did nothing on balance.
In the 1970s, the Netherlands, along with much of the rest of the world, also struggled with a combination of economic stagnation and high inflation. And that was particularly bad for stock prices at the time. How bad? Hold on.
That is twenty years in the desert, but dividends were paid in the meantime. If that is taken into account, and inflation is subtracted from this, then there remains a period between 1969 and 1983 in which nothing happened on balance.
The question is: is such a period exceptional? In the Netherlands, yes, but that mainly has to do with the fact that our stock exchange dates do not go back that far. They do in the United States. The Dow Jones average can be traced back to the year 1900 – when railroad companies still dominated that index. If you compare the position of the Dow over the years with the position of 14 years earlier, you will see that there have been quite a few periods in which the prices did nothing for such a long period.
War or a structural macro-economic malaise appear to be the main causes of such a prolonged lull on the stock markets. And splashing soap bubbles. It took a very long time for the European stock markets to recover from the price peaks of the dotcom bubble of 2000. That certainly applied to the Amsterdam stock exchange, which contained a relatively large number of tech funds.
What does that say about today? We are on the eve of one of the largest pension reforms ever. The House of Representatives has already approved it, the Senate still has to vote on it. There is some urgency to this, because the elections for the Provincial Council are coming up and could then result in a composition of the Senate in which success for the new pension law is not guaranteed.
At the same time, we are at a crossroads for the global economy. If, after war and geopolitical disagreement, globalization still wins, inflation can go down, interest rates can fall again and healthy economic growth awaits. Good for shares, although those low interest rates are often unfavorable for pension investors. If, on the other hand, it becomes ‘geo-economic fragmentation’, then one can count on higher inflation and lower economic growth. That scenario is significantly less favorable for equities.
It is precisely equity investments that will play a leading role in the new pension system. In this new plan, the contribution of pension participants will remain stable, but the benefits will soon vary with the success of the investments. The influence of shares becomes relatively small for older participants, because their pension pots benefit more from stability and less risk, at the expense of the higher return expected from shares. This works the other way around for young people: their benefit is so far in the future that more risks can be taken on the way there.
The assumption under the plan remains: returns on stocks are always superior in the long run. But that partly depends on which world we end up in. The latter is unknowable, and in the end it always turned out well on the stock markets. Although – always? At the end of 1989, Japan’s Nikkei 225 index peaked at nearly 40,000 points. The index is currently still nearly 30 percent lower than it was then. It is now 33 years later: that is already quite close to a full working life – and pension contribution payments.