The world is in a mess: buy global equities

Markets turn at the point of maximum pessimism, and always before the underlying economy. This is the time to be buying, not selling.

The world is in recession: we have just experienced the first-ever run on the global banking system and we are about to enter the first synchronised global recession since the 1930s. Deleveraging and inflated house prices mean that the recession is likely to be deep and long.

Cash is not king

In times like this, the temptation to sell risk assets and sit in cash is immense. But this may not be the right move for the long-term investor, for two reasons.

Firstly, unprecedented monetary and fiscal stimulus will ultimately be inflationary. The US Fed has demonstrated that it will stop at nothing to reflate the US economy and, in time, the safety of bonds and cash will prove to be illusionary as inflation erodes the real value of savings.

Secondly, global equities currently present a once-in-a-generation buying opportunity. Most South African investors are under-invested in global equities. The offshore weighting for the average investor should be between 20% and 30% through the cycle, and with the excellent value currently on offer, investors should be at the top end of that range.

The case for global equities

The case for investing in global equities can be summed up as follows:

1. This is a crisis, but it isn't financial Armageddon.
Every crisis in the last 20 years has been short and sharp. While this is not expected to be the case this time around, policy stimulus will stabilise the world economy. After that, it will take several years to recover from inflated house prices and excessive leverage. While the economic outlook is poor, and newsflow is unlikely to improve in the near term, we are not in financial Armageddon. Unlike the 1930s, unemployment is in single digits and the authorities are responding to the crisis with unprecedented stimulus.

2. Prices have already corrected.
Investors should not become too negative after a major sell-off. The market is a very efficient discounting machine and at these levels already prices in a recession, with the Dow Jones having had its second worst year in history and the Nikkei its worst.

3. Valuations are compelling.
Global equities currently present a once-in-a-generation buying opportunity. The last time the MSCI World Index traded at current ratings was the early 1980s, and many of the best companies on the planet trade at single-digit multiples; something I never thought I would see in my investment career.

4. When markets turn, they move quickly and no-one sees it coming.
In every bear market of the last 40 years markets have posted massive gains when investors least expected it.

Paradox of investing

Instead of timing the markets, the focus should be on getting the long-term intrinsics right, with a big enough margin of safety - then you actually have time on your side.

Investing in global equities as this time is a great example of the paradox of investing where 'buying low' often requires investing when the newsflow is poor, and 'selling high' often requires selling when the outlook is good. Buying high quality companies with good franchises at low prices will always be the only sure path to wealth creation.