By STEPHEN MARRIOTT 14/09/2010
The patience of investors in the UK and US stock markets must be wearing thin after nearly twelve years of flat markets. Of course since 1998 one would have received dividend income and a number of good active managers have capitalised from superior stock selection.
But given recent volatility and with markets lurching from a positive mood one day to depression the next it has been difficult for investors to judge when to invest. And other traditional asset classes such as bonds and cash do not offer much appeal, for example 10 year UK gilts yielding a meagre 2.9%.
Transaction volumes remain weak
London Stock Exchange volumes are some 40% lower than three years ago reflecting the pessimism towards shares at the moment. However, there are some positive signs for shares – company profits in the non financial sector in both the States and UK are rebounding, which is mainly a reflection of cost cutting and thus margin expansion. The US second quarter earnings season has just come to an end and corporate profits grew at an annualised rate of 20%. The future also looks positive as current consensus estimates for Earnings Per Share growth in 2011 for the S&P 500 and FTSE 100 are 14.8% and 15.2% respectively. These numbers are safe so long as we don’t experience a double-dip recession.
Are stock markets cheap by historical standards?
Valuations suggest that the UK and US stock markets are no longer expensive and are closer to long term norms, in August the UK was trading on a cyclically adjusted Price Earnings multiple of 14.3 times and the US 21 times. But it’s the quality large cap companies among these markets that look most interesting on valuation and yield grounds according to a number of respected fund managers. Managers such as Tony Nutt (Jupiter Income), Nigel Thomas (AXA Framlington UK Select Opportunities) and Colin Morton (Rensburg UK Equity Income), have been investing in high yielding large cap stocks with strong cash flow attributes. And Bill Miller (Legg Mason US Equity) has gone as far as saying that US blue chips are the bargain of a lifetime.
Dividends look healthy
The FTSE 100 currently has a dividend yield of 3.3% and this appears well supported, with the dividend cover for the market at 2.2 times. And interestingly, one can find 13 companies in the index yielding 5% or more. Excluding financials the four highest yielders are National Grid (6.6%), United Utilities (5.8%), Royal Dutch Shell (5.5%) & British Land (5.4%) and there are three companies in joint fifth place yielding 5.2%: BAE Systems, Seven Trent and Vodafone.
Often a catalyst is required to awaken investor interest but, with potential returns so low in other asset classes, investors are being forced to look to higher yielding shares to provide them with superior returns. And maybe we are seeing signs of increased interest if we consider that so far this year the net sale of Equity Funds has bounced strongly to £7.3billion.
If there is anything you wish to discuss please call one of our Investment Professionals on 020 7189 9999.