›  Opinion 

Equities as yield assets

Back in the 1950s equities were seen as yield products, being as utility type assets. It was only from the 1960s that stocks were seen as growth assets. 2011 has been a watershed because yields have exceeded bond yields

Article also available in : English EN | français FR

The current subdued investment recovery at a time of record corporate profits as a share of GDP suggests that companies are being run for cash rather than for growth. Indeed, it should be no surprise that several equity markets are offering dividend yields that exceed the yield on ten-year government bonds.

Our chart of the week shows the long-term history of dividend and bond yields in the UK, according to the Barclays Equity-Gilt Study. 2011 has been a watershed because yields have exceeded bond yields – for only the second time in the past 52 years – and perhaps we have returned to an old normal (rather than a so-called new normal). Back in the 1950s equities were seen as yield products, being as utility type assets. It was only from the 1960s that stocks were seen as growth assets, and during the 1970s became partial hedges against inflation. It is thus notable that a new watershed may have been reached and it is therefore no coincidence that the investment products du jour are income funds

JPEG - 5.1 kb
UK dividend and bond yields – back to the old normal

The politicisation of profits

This all raises two important questions: how long can the current situation last and what can governments do about it? There are several options for governments.

First, they can raise corporate taxes, thereby improving government savings at the expense of the corporate sector

Second, they can offer investment incentives to encourage increased capex, as the US has done

The third way out is to try to generate an export boom by weakening the currency (perhaps via quantitative easing, or QE), though in the current feeble global economy it remains to be seen how effective this would be.

Fourth, as suggested by Sir Samuel Brittan in the Financial Times, “there should be an antisavings drive” (though, once again, one could argue that QE serves this purpose). This last option speaks to the concept of financial repression, as coined by Professor Carmen Reinhart, which is the means by which governments will be able to reduce their debt relative to GDP. Such repression may take the form of negative real interest rates, or measures to affect the return on capital, but it will effectively involve a transfer from creditor to debtor.

Given the large surpluses of the corporate sector and the rapid growth in top executive compensation, it could be that “greedy bankers” could give way to the new objects of public scorn – the greedy corporates.

David Shairp , November 2011

Article also available in : English EN | français FR

Read also

October 2011

Note Estimating the Real Rate of Return on Stock Index

Judicious use of the rate of return framework on equity, or "cost of capital" facilitates decision-making within the financial industry by providing a metric for comparing different stock markets between them but also a comparison to other asset (...)

November 2011

Opinion Europe: bonds or equities?

One of the most surprising characteristics of the current crisis is the fact that bond investors appear to discount more eurostress than equity investors. Is this justified?

November 2011

Strategy Are equities finished?

It is therefore no doubt poignant to many to note that recently the 30-year total return on US Treasuries exceeded that of the S&P 500. Does that mean that the cult of equity is over? Certainly the cult may be, but it is highly improbable that equities are (...)

Share
Send by email Email
Viadeo Viadeo

Focus

Opinion Psychology and smart beta

‘Smart beta’ sounds like an oxymoron. How smart can it be to continue using the same strategy in such fickle markets? A portfolio manager calling on all his skills (‘alpha’) in analysing market environments (the source of ‘beta’) should be able to outperform an unchanged (...)

© Next Finance 2006 - 2019 - All rights reserved