Lively lessons for investors to heed from quiet half year

First, related to that eerie calm, it’s clear that you can sometimes be too cute about your investments. The absence of volatility has caused many to worry that investors are not worrying enough. It all feels a bit too much like the calms before the storm in the late Nineties and again in 2007. But as my chart shows, low volatility can go on for extended periods. The line charts the cost of insuring against market swings — the so-called Vix index, also known as Wall Street’s “fear gauge”. Yes, it is low but it stayed at these levels for much longer in the Clinton years and again between the dotcom bust and the financial crisis.

Second, low volatility can breed complacency and recent months have shown the early signs of excess creeping into financial markets. Examples of warning lights on amber include the IPO market, where the quality of companies choosing to float is deteriorating; commercial property, where the chase for yield has taken investors as far as Spain, where they are happily ignoring the deflationary threat and still high unemployment; and the bond market, where that alphabet soup of derivatives is making a comeback. But the lesson for me is that worrying too soon about excess is a recipe for expensive inactivity. This feels like 1996 in the equity market and 2005 in bonds and property. It’s too soon to take money off the table.

Third, what seems obvious is not always right. The overvaluation of the bond market seemed self-evident at the start of the year but fixed income has been the place to be in the first six months of 2014. Bonds have defied the sceptics because the demand for safe income has not gone away; new equity highs have persuaded some investors to cash in and match their liabilities with more predictable investments; inflation has remained subdued; and, simply, in a low interest-rate world, the attraction of a reliable 3pc income from US Treasuries has put a lid on bond yields.

Fourth, events are unpredictable. Nowhere has this been clearer than in commodities. Agricultural resources soared and then slumped back — blame the weather. Gold slid and then recovered — point the finger at the Fed. Metals moved sideways — that’s largely the fault of the Chinese. And oil was spookily calm until out of the blue the Syrian catastrophe crossed the border into Iraq. If anything could derail the recovery it is a 2008-style spike in energy costs but, until a couple of weeks ago, this was on no one’s radar.

Fifth, hope springs eternal. The enthusiasm of investors for Narendra Modi’s BJP party was evident as soon as it looked likely that it would put an end to the last 10 years of Congress rule in India. The lesson from the surging Sensex is that it is often better to travel than to arrive in investment. The Indian market has risen by around 60pc between the beginning of 2012 and the midpoint of 2014. At some point investors will start to question how well the challenge of transforming a huge and diverse country is priced in.

My sixth lesson is that, in investment also, patience is a virtue. I have been waiting and waiting for the valuation differential between the UK’s out of favour blue-chips and its popular mid and small-caps to be recognised by investors. The last three months have finally seen the FTSE 100 outperform the smaller indices. Another lesson from history is that once this preference kicks in – as it did in the four years after 1996, for example – investors can favour mega-cap stocks in a big way. The outperformance of the S&P 500 over the Russell index of America’s small-caps was spectacular during the dotcom years.

There’s always something to learn from Mr Market. But the past six months have been particularly instructive. If you want to hear my full outlook for the year ahead, watch my Twitter account . I’ll tweet the link to next Wednesday’s live “webinar” in the next couple of days.

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