Investment Comment January 2012

We said in our investment commentary in October that earnings yields in most equity markets compare very favourably with bond yields relative to history. That continues to be the case, despite recent rises in the stockmarket as a result of the last minute resolution of the fiscal cliff issue in the US. The House of Representatives passed legislation raising taxes for the wealthiest Americans, which solved the issue at least for the time being.

When surveying the investment scene, the striking feature is the yield on 10 year US treasuries (1.82%) and UK gilts (1.99%). Although the yields are off the lows for last year, they are still below inflation and exceptionally unattractive. To buy now would be to combine the certainty of a poor income with the strong likelihood of capital loss, as yields begin to revert to more normal levels. Looking at the long-term chart of the yield on US treasuries going back to 1900, published in the Financial Times last weekend, makes it clear how unprecendented the current yields are. It is possible that 2013 will be the year when the reversal begins, and when it does there could be a large move from investing in fixed interest back into equities, a process which could support the stockmarket for a considerable period of time.

Other factors that are positive for equities are: the dividend yield, 3.57% for the UK All Companies and 2.2% for the S&P500; the large amount of cash on corporate balance sheets in Europe (euros 750 billion) and the US (US$ 2 trillion), which could drive increased activity in mergers and acquisitions.

Overall, we feel positive about the outlook for equities, therefore, particularly in some of the places that have been unloved. Japan has been performing well over the last two months, with the right sort of comments coming from the new Prime Minister Shinzo Abe. The Chinese stockmarket looks very good value, after a long period of underperformance. We continue to be positive about the investment opportunities in Europe and Asia.

As always, the key is to have a balanced portfolio, invested in all the main asset classes in line with your objectives and your attitude to investment risk. The proportions invested in the different asset classes can be adjusted gradually as economic conditions change, but overall it is best to remain fully invested.

 

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Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.