World equity markets have been powering ahead. The US recovery looks stronger, which in turn encourages investors in Asia and Europe to increase their exposure to risk assets. The monetary authorities of the world have rattled their sabres about increasing interest rates and withdrawing some of the special liquidity they put into the system, but they have not yet got far in moving to tighter money.
It is perhaps time to pause and remember some of the negatives still lurking beneath the easy money. Several countries have now started to increase interest rates. More will do so as the year advances. India, China, the US and the UK are all embarked on some monetary cooling. There are still huge imbalances between the exporting high savings countries and the importing high borrowing countries. We are living through a slow revolving sovereign debt crisis, attention moves from Iceland to Ireland, from Greece to somewhere else. The banking crisis has been contained, but there are still many banks that need to nurse their exposures and be careful about new commitments.
Above all it is a good idea to look again at yields and likely future returns. World shares are now offering below 2% by way of income.
|
|
Yield (%) |
|
Japan |
1.8 |
|
China |
2.5 |
|
India |
1.0 |
|
US (S&P 500) |
2.3 |
|
UK |
3.1 |
|
Germany |
2.9 |
Source: FT Stock Market – Ratios
There will be good profit and dividend growth this year, but there needs to be to justify current share price levels. In recent weeks we have added to property positions, where the yields were much more attractive. Buying into Asian REITs on a yield of 3.5%, and into Developed world and American property REITs on yields offering a good additional income to shares generally looked like an opportunity. Even these now have risen so the running income is at less attractive levels.
UK shares are offering better yields than most advanced markets. We have strongly preferred Asian equities for the last five quarters, which has worked well as they have performed better. The large UK capitalisation shares in the large company indices are shares in multinationals trading mainly outside the UK, with plenty of foreign currency exposure in both assets and revenues to offset any fall in sterling. As a result we are no longer so negative on the FTSE 100, as the yield now does offer some comfort compared to other world markets that have risen by more.
We remain negative on UK government bonds and the UK domestic economy. The election is postponing the necessary remedial action to tackle the public finances and sort out the banks. Election uncertainties, with some commentators and investors now worrying about a hung Parliament, are a further reason for caution.