The polarisation of the market between technology, media and telecoms (TMT) stocks and the rest has ...
The polarisation of the market between technology, media and telecoms (TMT) stocks and the rest has caused many investors to ask if there is any point investing in above average yielding stocks when they seem to keep going down? Is equity income important when capital returns seem so attractive elsewhere?
I would suggest that there is a place for an equity income fund in every portfolio. The sector offers the prospect of good total returns going forward but also can be used as a portfolio diversification for more growth-oriented investors. High yielding stocks have been spurned by investors as they are seen as the 'victims' of the new economy. Apparently threatened by new internet rivals the retailers, banks, property companies and others have been savagely derated. Market trends tend to be like the swings of a pendulum; the market will tend to swing too far one way before reversing and coming back towards fair value. Whilst it is right that the internet has an impact on the 'old world' stocks, it will not all be bad news. The trend towards derating these stocks has, in my opinion, gone too far and has ignored the benefits for the old world stocks of the information revolution.
The positive impact of the internet on higher yielding stocks will come in two ways. Firstly, procurement via the internet is estimated to save the average company between 10-15% per annum on their input costs within the next couple of years. Inevitably, some of this will be passed on to customers in lower prices but there will still be a positive impact on profit margins. Secondly, those companies with good brand names will be able to use the internet as a way to enhance their relationship with their customer.
New internet-based entrants will have an impact on many sectors but the majority of business will stay with the large incumbent market leaders. Despite this, the market seems to be pricing in a meltdown in many sectors. For instance, many of the banks now offer a dividend yield in excess of the interest rates available on their deposit accounts; property companies trade at rental yields on their underlying properties of more than twice that available on Government bonds.
But are bank profits going to be so eroded that they will have to cut their dividends? Will rent rolls fall by more than 50%? I would suggest that neither is likely. These companies have adapted to savage downturns in their markets in the past and will come out of this period of uncertainty stronger for the experience.
As for stores groups, even the most optimistic estimates for the size of the e-tailing market give a value that would account for less than half of the growth in retail sales over the next five years. Yes, growth for the bricks and mortar retailers will slow but it won't go into reverse.
For the income conscious investor, the case for investment in equity income funds at present looks compelling. However, I believe that growth investors should also consider the more traditional equity income funds for some of their dot.com profits.
Geoff Miller is fund manager at Exeter Asset Management
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