Richard Harris

The View | 9 lessons for investors in new era of stock market record highs

To better understand the current conditions driving record stock prices across the globe, investors would do well to learn the lessons of history and look back at the situation in Germany after the fall of the Berlin Wall

Reading Time:3 minutes

Why you can trust SCMP

A visitor takes photos of an electronic screen displaying Japan’s Nikkei share average, which surged past an all-time record high set in December 1989, inside a building in Tokyo on February 22. Photo: Reuters

Richard Harris

Published: 3:15pm, 29 Feb 2024Updated: 4:14pm, 29 Feb 2024

One day last week, my screen of daily global stock market price indices was a sea of green as every price was up. India touched an all-time high a month ago, earlier this month it was Australia and last week the EuroStoxx 600, the US S&P 500, Taiwan and Japan all breached all-time highs.

I remember Japan’s last high in 1989, when shares and the yen both doubled in four years. A pizza in Roppongi cost more than US$50.

Lesson One of investment is that what goes up in a surge of narrative often comes down sharply as the strands of the narrative mutate into more realistic assessments of the events. The Nikkei index plummeted 56 per cent in the next four years and only levelled off 20 years later, more than 80 per cent below the high.

Lesson Two for global investors is that currency is like the paper on which a great master’s work is painted – it is fundamental to valuations. Unsurprisingly, the recently soaring Japanese stock market has been helped by the significant fall in the yen.

Totally green screens are a rare occurrence because most days at least one market somewhere in the world spoils the pattern. Today’s risk-on dominant market narratives driving price rises include the artificial intelligence bubble, the proven strength of the global consumer, stable inflation and interest rates, and the government spending windfall during the Covid-19 pandemic.

Floor traders jostle on January 7, 1988, as stock prices soar on the Tokyo Stock Exchange following the sharp rise in the yen against the US dollar, pushing the main market indicators to record levels. Some 35 years after Japan’s asset bubble catastrophically burst in the early 1990s, the Nikkei 225 finally clawed its way back above its bubble-era record on February 22, but this time many ordinary investors are driven more by concerns about savings and pensions than coveting fine art and penthouses. Photo: AFP

These all-time highs remind me of the lessons I learned running European investment portfolios in 1990. It was a Goldilocks time because the Berlin Wall had just fallen and the narrative of the reunification of Germany had caused a surge in the then-nascent German market. Share prices rose steadily across two years before a repeat of Lesson One saw the German DAX index fall by a third in 1990.