Those readers who are long enough in the tooth to have been participating in the markets in the 90s may resonate with the following. 
Think back to the housing market crash of 1989/90 and interest rates of 15 per cent which were required to control rampant inflation that was the result of the overheating economy that marked the end of the 1980s economic boom.
This brought about a deep recession and Britain’s exit from the Exchange Rate Mechanism (ERM) in 1992 which was supposed to be Sterling’s flexible straitjacket ahead of joining the Euro.
The ejection and subsequent currency devaluation then brought about a period of resurgent economic growth through the rest of the 1990s which convinced most that ever being part of the Euro would be a bad idea.
This was especially sensitive as it was the German Deutschemark to which Sterling had been attempting to peg itself and anti-imperialism was strong at the time, splitting views within British society.
The UK’s exit from the ERM allowed interest rates to fall rapidly without re-stoking inflation, which, despite the collapse in Sterling, remained subdued. This led to a prolonged period of strong economic growth which endured through the bursting of the TMT bubble in 2000 as the UK economy wasn’t particularly reliant on TMT earnings.
Price performance of index between 1990 and the TMT bubble
Source: FE Analytics
Strong economic expansion continued through to the Great Financial Crisis of 2008 with Gordon Brown laying claim to 17 years of uninterrupted economic growth.
However, much of this growth was achieved through a spectacular policy failure which led to a collapse in Sterling and a surge in competitiveness, which would have happened regardless and is largely a benefit of circumstance than any plan that any political party can lay claim to.
And that brings us to the point of this historic journey.
One of the predicted consequences of the adoption of monetary policy and the control of inflation through interest rates was lower nominal equity market returns.
This has not actually been experienced to date but we have had two periods of extremely strong equity returns followed by markets halving in capital terms (ignoring dividends) where the rises have endured for around five to seven years and the halving for the next one to two.
Price performance of index over 5yrs
Source: FE Analytics
It could be argued that what we are currently experiencing, where we have ultra-low interest rates, very subdued inflation and modest economic growth is the new normal and is actually highly desirable as it removes the boom and bust.
However, investors are missing the boom and are therefore feeling disappointed with their equity market returns which is leading to a search for rational explanation as to why markets are making such little progress.
This in turn is leading to introspection and deep analysis of all that is wrong with the global economy, whether it be the Chinese slowdown, the next Fed interest rate increase or Brexit as this must be holding back investors from buying the market and pushing prices higher.
In fact, the lack of an economic boom is dampening speculation and risk-taking and leading to an abundance of capital in other areas such as property, private equity and passive investing as there are very few obvious investment opportunities to provide the next thematic wave of growth.
We have had the technological revolution of the internet through the 1990s and then the BRICs and their expansion boom through the 2000’s so what next post the credit crunch?
Until that question is answered, it feels like the equity markets will be in the doldrums with top-lines driven by inflation and population expansion and returns dominated by dividends.
Even so, this will still provide real returns which are attractive but, as with all old habits, it will feel relatively disappointing and that leads to a general feeling of bearishness. At least summer lies ahead!
Guy Stephens is managing director of Rowan Dartington Signature. All the views expressed above are his own and shouldn’t be taken as investment advice.
