Market conditions have been difficult over the past six months, although with the benefit of a stron...
Market conditions have been difficult over the past six months, although with the benefit of a strong autumn rally and another coinciding with the onset of war in Iraq in March, the key market indices are generally slightly up, or at least flat, over the period.
The only exception to this is Japan, which has fallen in sterling terms by nearly 10%. As yet, no bottom has been firmly signalled, making this the longest, if not the deepest, bear market in living memory. Inevitably, many investors will be questioning the continued logic for holding shares.
The bear market can partly be explained as a natural reaction to the irrational optimism and over-exuberance of the late 1990s. The unwinding of these excesses has been painful and, as a result, investor confidence has been seriously eroded. Increasing geo-political tension and uncertainty has made matters worse, as has forced selling by UK life firms, which has pushed down prices relentlessly in that market.
On a more positive note, central banks have cut interest rates further to stimulate economies, and rates are now at very low levels by historical standards. Despite poor sentiment, most key economies are still growing, albeit slowly, and inflationary pressures are low. While results from companies have been patchy, there are many which continue to grow earnings.
The UK market is now attractive in historical terms, with the dividend yield exceeding deposit rates and we believe the negative influence on equity markets from life company solvency issues is largely over at current market levels. In the US, earnings estimates are tending to fall against an outlook which is cloudy and possibly deteriorating. But there remain US firms that are conservatively managed and have defensive qualities which, on the whole, offer considerably better value than the market as a whole.
By contrast with the western economies, Japan has suffered many years of decline. However, firms in aggregate are showing reasonable profits growth this year and there are other encouraging signs beginning to emerge. The challenge in Japan lies with the slow pace of reform and fundamental structural economic issues.
The other Asia Pacific markets have declined by less than the Japanese, and the rapid growth and increasing size of the Chinese economy is becoming very significant to the region.
With most markets standing at low levels, we believe well managed quoted companies with good long-term prospects give investors an excellent opportunity to participate in general economic growth and will prove good investments on a five-year view, if not necessarily over the next 12 months. When selecting such firms, close attention needs to be paid to the quality of earnings and to the soundness of accounting standards.
At current levels, we consider that the attractions of many equities are understated by markets especially when the dividends they pay are compared to bonds and cash deposits.
However, we do suggest that investors be realistic in their expectations, as any sustained interest for recovery in values may take some time to become firmly established. In the short term, conditions may well continue to be turbulent and volatile.
entral banks have cut rates to low levels.
Attractions of many equities understated.
Life company solvency in the UK rectified.
Feasibility study due
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Joint life second death option added to relieve tax burden on couples gifting assets
Backed by Schroders, LGIM and the IA
New system for funds without without three-year track record