Tag Archives: equities

Points of View: Inflation

Consumer prices in the United Kingdom increased 0.3 percent year-on-year in May. At this low level, and after years of falling headline numbers, investors may be forgiven for not giving this too much thought. However, despite the historically low inflationary environment, the longer term effects and the power of compounding cannot be ignored – the value of £100 ten years ago, for example, is worth less than £80 today.

Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Inflation can be seen as a compound interest which we are all forced to ‘pay’, and by understanding it we should seek to find assets which consistently protect against it in the long term.

Equities, property, inflation-linked bonds and commodities are often championed as hedges against inflation, but none of these are perfect; property is illiquid and vulnerable to prolonged periods of depressed values; inflation-linked bond prices are influenced by inflation expectations, which are only loosely correlated with changes in actual inflation; and commodities can be volatile and do not provide an income. Equities are also volatile in the short term but are arguably the most reliable source of real returns over the long-term, not least because the underlying companies buy and sell products at prevailing market prices. In any five year holding period over the last 30 years, for example, UK equities produced a real (above inflation) return 80% of the time.

It is this relatively reliable ability to generate attractive real returns over time that leads us to build long term portfolios around a dominant core of equity exposure.



Points of View: Valuation Dispersion

Whilst we remain confident in the ability of equities to continue to deliver attractive real returns for investors over the long term, there is no doubt that care is needed in the current financial markets. First and foremost, quantitative easing looks to have created asset bubbles in certain areas of the market – most notably in conventional fixed return assets (when vast swathes of bonds trade on negative yields, it is not hard to determine that the long-term returns from this point will be poor) but also in certain areas of the equity market.

US equities, for example, have enjoyed an exceptionally strong run of outperformance since the nadir of the financial crisis in March 2009.  However, a significant part of this outperformance has come at the cost of increasing valuation risk. Indeed, the valuation discrepancy between the US and other major equity markets is now striking. European equities, for example, currently trade at a discount to their US counterparts that is close to historical extremes. There are of course good reasons for this – economic growth in Europe is slow to non-existent (despite negative interest rates in many European countries) and the EU looks ever more like something of a failed experiment. However, one of the most counterintuitive aspects of investing is the fact that bad news is almost always required for things to get cheap enough to create good long-term investment opportunities. From this starting point a reversion to mean would result in underperformance of the US market for a period.

Having said this, it is worth noting that fundamentals in the stock market do not work to a set schedule and assets can remain cheap or expensive for extended periods.  The challenge for us as investors is to balance the merits of quality and value within a diversified and resilient portfolio.

September 2014 Market Review

This edition of the Market Review discusses the effect sterling volatility has on markets, whether past FTSE patterns should be a guide to the future, and why we remain strongly in favour of equities.

September 2014 Market Review

Boom-time for IPOs

Recently the press has been full of articles about companies looking to raise money by coming to the market and listing on a Stock Exchange.  These are known as Initial Public Offerings (IPOs) or “Floating” on the Stock Market, and 2013 was the year when IPOs made a huge comeback.  For the UK it was the best year since the start of the financial crisis with bullish equity markets underpinning IPO demand.  Two of the most high profile listings were Royal Mail in the UK and Twitter in New York.

This trend looks set to continue into 2014 with a large number of companies looking to float including high street names like Poundland, Pets at Home, Game Group, Fatface, House of Fraser, and Phones 4 U to name but a few.  The first quarter of the year is a popular time for retailers to come to the market, after the crucial Christmas and New Year trading periods have finished.  Reportedly there are about 60 companies looking to raise about £15bn by April this year.

For fund managers this is a challenging time with the sheer number of companies looking to float putting strain on time and resources.  Fund managers have to analyse the companies, judge whether they want to invest in the new issue and if the IPOs are keenly priced.  They also often have to consider whether to sell established, existing investments to fund purchases of new shares. 

So far this year equities haven’t sustained their 2013 rally, as evidenced by the recent market set-back.  Although signs of economic recovery are encouraging, companies now need to focus on growing their revenues so this can feed through to employment and wage growth to support the recovery going forward.  It remains to be seen whether the appetite for IPOs will be maintained in light of a less buoyant stock market backdrop.