Investment Comment January 2013

We said in October that earnings yields in most equity markets compare very favourably to bond yields relative to history.  That continues to be the case, despite recent rises in the stockmarket as a result of the positive news from the US.  In addition, dividends can increase, whereas fixed interest yields cannot.

Overall, 2012 has been a relatively good year in the stockmarket, despite all the problems in the Eurozone and elsewhere.  The Top UK 100 Companies index of leading shares in the UK is up 5.75% over the year to 2 January 2013, and the Top UK 25f0 Companies is up 21.71% over the same period.  The S&P500 in the US is up 14.51%.  Even Japan managed to have a good year, with the Nikkei 225 index up 21.44%, as the markets reacted positively to the new Prime Minister Shinzo Abe.

The prospects for 2013 look positive for equities because dividend yields are supportive, with the Top UK 100 Companies yielding 3.7% and the S&P500 2.2%, and valuations still relatively low in several major markets.  This contrasts with Government securities, which mostly look poor value.  For example, the yield on 10 year US Treasuries is currently 1.84% and on UK gilts is 2.00%.  Admittedly this is not as low as they have been, but they are below inflation and unattractive given the likelihood of suffering a capital loss when interest rates start to rise again.

Indeed, 2013 could be the year when the trend for fixed interest reverses.  Since the early 1990s interest rates have been falling, which has resulted in capital gains on bonds.  The yields have fallen to unprecedented levels, and this could result in investors shifting funds from fixed interest to equities, where returns are more likely to be positive.  This could be a major theme for 2013, as confidence begins to return.

An additional factor supporting equities is the large amount of cash sitting on corporate balance sheets, both in Europe and the US.  This could result in an increase in mergers and acquisitions.

As always, it is important to have a balanced portfolio, invested in all the major asset classes, in line with your objectives and attitude to investment risk.  Any changes in asset allocation should be gradual, because of the difficulty with precisely timing the markets.

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.