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Shareholders, don't ignore what government bonds are telling us

The equity market and the government bond market seem to be giving investors mixed messages but you can use the bond markets to decide where to put your cash.

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by Deborah Hyde on Sep 10, 2010 at 09:40

He thinks real dividend growth next year will be around 5% next year as banks and companies like GKN will either begin paying dividends again or lift their payouts. However he said currency markets could affect the growth rate as many companies pay their dividend in dollars.

Investors are too worried

Top-ranked Credit Suisse strategist Andrew Garthwaite agrees the economic backdrop means 'this is a difficult phase of the cycle for equity markets with lead indicators rolling over and earnings momentum having briefly turned negative.

'The consensus among clients seems to be that we are in a L-shaped recovery, that bonds are telling us that we are slipping towards a Japanese-style scenario in developed markets, and that we cannot be in a bull market,' Garthwaite said.

But he believes we are facing a normal slowdown rather than a 'double dip' and calculates that the fiscal tightening will shrink GDP in the UK by just 0.8% if yields on bonds remain where they are now.

And Garthwaite has identified ten reasons why investors should stay overweight shares including: low valuations, the fact that earnings growth is unlikely to turn negative, that most of the economic disappointment in the US has already happened and the government and central banks stand ready to act. He also points out the cost of insuring debt has remained low suggesting share prices should be higher.

Importantly, Garthwaite says equity holdings by mutual funds, insurance and pension funds are at or near record lows suggesting selling pressure may subside and says there are signs that money has already begun to flow back into the stock markets.

He thinks seasonal factors will help and he believes the FTSE 100 could grow 7% from here by the end of the year to 5,800.

Stock selection is key

Like Harrison, Garthwaite believes investors need to be selective about what they buy and pick up stocks with exposure to the emerging market consumer, which have abnormal pricing power or could take part in M&A. He suggests Enterprise Inns and N Brown are potential targets and thinks Capita, Compass, Imperial Tobacco offer quality growth, while SABMiller should benefit from the emerging market consumer.

He said investors should avoid companies focussed on the US or which derive a bulk of their revenue from governments.

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13 comments so far. Why not have your say?

With the FT100 almost back at 5,500 I do wonder why it seems so strong when you read about job losses, house prices looking like they are begining to fall and some retailers coming up with worse then expected profits and many other indicators which suggest the outlook is not that good and yet the Uk stock markets shrugs off any negative news and carries on going up. Dont know what investors are pricing in , but surely its not based on a strong recovery for later in the year and next year is it?

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There is no fundamental reason for the FT100 to be where it is, I am selling out my holdings, wherever I can, with cash, ready for storm.

Of course you have a bad economic situation, ,Greece will end up defaulting, as there is no way it can service its debt.

There are too many problems, I am only glad that I have some cash ready.

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Good article

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Personally I am mainly sticking with what I have got....generally solid mega cap divi paying companies in what I call my general portfolio and a wider spread of investments in my SIPP.I am about 20% cash in both and intend to stay that way for the time being.

Rightly or wrongly,I am not one for selling out as I am not clever enough to time getting back in the markets.I'll just keep taking the divis in my general portfolio and ride out the storm with my SIPP, thus keeping dealing costs down and trusting that Armageddon is not on the way!If I'm wrong ,well I may have to take to the bottle and drown in a sea of good malt whisky!

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Further to my rambling above,I also hold Blackrock Gold & General in both general portfolio and SIPP....have done very well and I am going to continue to hold.

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Good article apart from repeating the illusion that it is "investors" who trade the markets up and down. "Investors" (as in your 'buy and hold' brigade) have no say in where the markets go. This chart shows clearly the retail "investors" are nowhere to be seen in this puffed up rally. Just the FED / BOE / ECB and the free money dished out to the institutions. There has been no volume at all in this bull trap rally. We also have the US elections coming up - always good to pump up the markets before those and then dump straight after.

@ Joe Bloggs - options ex week next week, so good time to get out before next week's whipsaws. There will be volume as the traders are back from hols.

Save some whisky for me Grumpy Old Man!

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chart referered to above:

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/shirakawa/Fund%20Flow.jpg

plenty of others around showing the same thing.

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If I may pick up on two of the three respondents so far, Graham's concern about the detrimental impact of job losses may be unnecessary as in the private sector at least, the market interprets the shedding of presumably unproductive jobs as beneficial to future potential profitability and this will be reflected in share valuations. Regarding Joe Bloggs's intention to sell out, he may be right or he may be wrong - who knows? However even if Joe's timing is right for now, will he pick the right time to re-enter the market. Market timing is very difficult to get right. Personally, I am taking a 15 year view on my equity investments and therefore am happy to stay invested. I took this stance ahead of the market downturn commencing in March 2000 and again through the turmoil of 2008 and remain substantively in positive territory. I believe that the biggest worry for long-term investors is not deflation but inflation. I want my assets to retain their value in real terms. Currently neither bonds nor cash can do this and therefore I ignore bonds other than index-linked and hold cash on a two year liquidity needs only with the rest in real assets such as property and equities. Maybe I will be proven wrong but I am willing to live with my mistakes although I am not losing any sleep in the current market climate.

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Well done Deborah Hyde, that was an extremely informative article. I just hope that my balancing act of holding some Bonds, some Shares and some Cash will see me through !!

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I totally agree with you Chartered Accountant, I too survived fully invested during the 2008 debacle and my investments have fully recovered as though it had never been - touch wood; could still go pear-shaped, I know; who can tell. I too have never bothered with government bonds, they seem so incredibly boring, and as for telling us anything it is surely fatuous jargon; surely the reason bonds are on low yields is simply because people are piling into them, thus it is a reflection of human sentiment with regard to the future which is amply expressed in many ways at present. No one knows what will happen next, the market is having a nervous breakdown, one can only follow one's general inclination.

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The reason why shares are on the up is simply because (a)there is still a lot of money sloshing around out there - it has to go somewhere ! And (b) buying shares and getting a reasonable return as well as the opportunity to see your money grow is far more preferable than depositing money with the bank, and still be able to get at it, to earn just 0.5%. No thanks. That is why I decided to forsake bonds and place my money in good, solid, companies - I am so glad I did ! Of course there are risks - but I believe that over the 26 different companies in which I am invested the risks are pretty low.

David MItchell

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If Cazenove's Mc Donald finds "official rates incredibly low for an incredibly long period of time", why should we believe it? Shouldn't we expect more careful writing frm professionals?

And "data are" surely, being plural,

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Chris Martin

Sep 14, 2010 at 08:36

I've been Chris Martin since 1961. OK. Long before pop stars and others as far as I know

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