Everyone seems so happy to see the rear of 2022. Not me. Despite losing my job and being short of a bob, I haven’t had to suffer a Zoom call since May nor unconscious bias training. Totally worth it. Plus my pension pot was up for the year and I shed five kilos over Christmas — a rare double, even if the latter was only due to a cough so severe I couldn’t even hold a pint glass.
The single blur on my jolly mood is how hard it is proving to move my savings into a self-managed pension. My last column explained why I was firing my two pension providers. To be fair, transferring one of them into a Sipp was a doddle. A simple online form and a week later the cash was there. The other, however, is putting up much more of a fight.
As well as archaic demands such as real signatures, for example, they insist I seek financial advice. Seriously? Why no exemption for those with a requisite competence? The form asks for the name of an adviser and their FCA reference number. Any reader want to volunteer? When I become a billionaire, I promise you can manage my wealth.
So I’m stuck with this provider for now. It’s the one with my global ex-UK stocks as well as the money market fund. No biggie on the former, but I’m desperate to put the cash back to work as it accounts for 27 per cent of my portfolio, as can be seen below. Half of that is earmarked for government bonds, as I wrote last month. The rest I want to put into equities — probably a sector fund.
Which sector I choose is the topic for another time. But why more stocks? Sure, they provide a better long-run return than any other asset class. Equities are risky though — might there be a better time to buy? The likes of Deutsche Bank and Morgan Stanley reckon there will be, forecasting another 20 per cent decline in US shares, for example.
Then again, more than half a trillion dollars went into equity ETFs last year, according to Bank of America data. But many of the cited reasons for optimism are nonsense. It matters not if interest rates have peaked. Valuations remain stretched. For me, the major hope for equities comes from a source less discussed — pain.
Let me explain. Companies, by which I mean employees and their bosses, prefer an easy life. Luckily for them, the past couple of decades have delivered juicy returns on a plate, thanks to low borrowing costs, stagnant real wages and generous tax regimes. China entering the World Trade Organization has also helped, keeping costs down.
My friend Bonnie could have run a world-leading company with this backdrop. Bonnie is a poogle. Indeed, US and European net profit margins have doubled in the past 25 years — with barely a sweat broken. Times are tougher now, though. Businesses are having to grapple with Covid, inflation, soaring interest rates and higher energy costs for starters.
Pesky employees want to be paid more, too. Most investors believe this is a bad thing. I take the opposite view. Costlier inputs force companies to innovate and invest. Thinking outside the box becomes mandatory. It’s not surprising to my mind that there is a long-run correlation between wage growth and productivity gains in the US, for example.
I cannot emphasise the importance of productivity enough. It’s a gooey subject, however. Output per hour worked or per unit of capital are easy enough concepts to understand. But in addition, there is a residual productivity factor, which is the economic equivalent of pixie dust. As an investor, here is a framework I use to think about it that helps.
Start with a simple identity that determines nominal wage growth (an economic identity is something that must hold, not some theoretical voodoo). Any change in employee wages equals the change in inflation, plus the change in productivity, plus the change in their share of profits — the latter being the inverse of company margins.
From this we can see the issue faced today. With wages skyrocketing, something (or things) must rise on the right-hand side of the equation. If productivity doesn’t improve, either inflation has to go up, hurting bond returns, or margins must fall, which is bad for stocks. Or both.
But if productivity does respond, suddenly it’s party central for investors. Workers enjoy rising incomes which boosts demand for everything. Meanwhile, prices can remain stable, as can margins — underpinning bond and equity returns. This describes the boom times in the mid- to late-1990s.
Of course, we’ve been promised a productivity recovery for decades and always been disappointed. But looking through my lens of pain you can now see why. Whenever companies began to feel some heat, from the financial crisis, trade disputes, Covid or whatever, central banks or governments put out the flames.
No pain, no gain. However, it is much harder for politicians or policymakers to douse the myriad fires today. Nothing like smoke to focus workers or panic a board room. There are already signs this is happening, with non-financial corporate capex in the US, for example, more than a tenth higher than pre-Covid levels. Research and development spending is strong across the world, too.
Is productivity improving yet? I would love to say the numbers are encouraging but that would be stretching it, even for me. Sure, labour productivity in the US rose by an annualised 0.8 per cent in the third quarter of this year, double consensus estimates. But the truth is that Covid has made a nonsense out of all the comparisons.
Like a fascinating yet unreliable friend, I’m going to give productivity to the end of this year to prove itself. Another no-show and I’ll stop answering the phone. Before then, however, my next move is yet more equities.
The author is a former banker. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
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