We meet our clients at regular intervals to discuss the suitability of their portfolios, performance and the market and economic outlook. The range of topics covered over the last few years have certainly been diverse: political turmoil in Greece, economic slowdown in China, mounting US debt levels, commodity boom and bust, and this year Brexit and the prospect of a Trump Presidency.
The ensuing uncertainty has led to volatility and low interest rates. Our clients are affected by both. A popular slide in our latest presentation pack starkly illustrates the knock-on impact of the collapse in yields: 20 years ago you could generate £10,000 of annual income from £135,000 of 10-year gilts. To generate the same £10,000 today you would need an astonishing £1,900,000.
“even when bought at 1972's peak valuations, a portfolio of nifty fifty produced annualised returns of 12.7% through 1996”
Low interest rates don’t just affect your fixed-income returns – they have driven up prices across all asset classes. When investors cannot find decent returns in ‘safer’ bonds, they look for other assets that deliver attractive and sustainable income. This could be in property, or in equity sectors such as consumer staples, telecommunications and utilities, where consistent cash flows lead to steadily growing dividend payments.
The consequence of this hunt for yield has been that the valuations of these high-quality cash compounding equities have risen sharply. This has led to comparisons with the 1970s when investors paid high prices for a concentrated group of American companies known as the ‘nifty fifty’ – US stocks which were perceived to be dominant and able to grow.
Investors were at times willing to pay as much as 80 to 100 times earnings per share, according to a study by Professor Siegel of the Wharton School. However, even when bought at 1972’s peak valuations, a portfolio of the nifty fifty stocks produced annualised returns of 12.7% through 1996.
Of course, there have been casualties in that basket, but that is what portfolio diversification is all about. The ability to hold the stocks for several years, to ride out the inevitable periods of volatility, is also a crucial factor.
The question for investors today is whether it is once again astute to pay a premium for quality cash compounders when secure income is so elusive – and this surely depends on having the ability to invest for the long term.
09 Jul 2019In this issue of Outlook we examine the trade war between the USA and China, discuss the future role of the dollar, look at how an ageing population will change the way we work, and ask if it's still makes sense to own bonds.Read more »
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