12/16/2011 @ 11:36AM
Article from Forbes
I came across this interesting 23 page client report from HSBC Global Asset Management in London that had me thinking of my own portfolio and my fear of buying more as a teeter on facing a maintenance call in my margin account if things get even a little bit worse. The report says a lot of the obvious — institutional investors are focused on the short term of under a year, which of course makes it hard for long term buy and hold investors to see any capital gains. Too much selling pressure. There’s the case made for dividend yielding equities, especially in emerging markets. As an aside, take Brazilian telecom company Vivo (VIV) — now known as Telefonica Brasil. It pays about an 11% dividend yield.
The growth outlook for developed markets has deteriorated, with much of the blame being put on Europe. As a result, developing economies will also see their economies slowing down even though they have more fiscal and monetary policy tools at the ready to avoid severe slowdowns.
One of Warren Buffet’s many famous quotes about investing is ‘be fearful when others are greedy and greedy when others are fearful’.
So for individual investors with money on the sidelines to put to good use, here are some takeaways on next year’s trends from HSBC’s report released this week. In short — go long dividend paying high volume equities, including those in the emerging markets, and get rid of those government bonds, especially if they’re European.
The Case For Equities
U.S. equity dividends are yielding just over 2%. Emerging markets, about 3%.
If you can look through the short-term fog, equities offer some excellent opportunities for building wealth in the longer term, as part of a balanced portfolio. Companies, in contrast to governments and the consumer, have been managing themselves extremely prudently. While the former were building debt to unsustainable levels, companies were paying down borrowing and building cash balances. Equity dividend yields currently stand at attractive levels – as the chart below shows – compared with government bonds, while company balance sheets are enabling them to grow dividends – a very attractive combination in a low interest rate environment. Valuations are also extremely low by past standards, as illustrated by the chart below. To some degree, this is justified with growth in developed economies likely to be somewhat lower than it was historically. But focusing on lower growth rates in developed economies ignores two key features. First, companies in developed markets are increasingly global in their outlook. They are not just a play on the economic growth of the country of their domicile, but instead can benefit from higher global growth.”
The Case Against Government Bonds
Bonds have been the beneficiary of an almost perfect storm – a long-term downward shift in yields, accelerated by investors’ pursuing safety in the short term. However, surely just as the bond evangelists’ calls for structurally lower yields become more vocal, investors with a long-term outlook should be avoiding this category given the prospect of negative real long-term returns.While inflationary pressures look muted in the near-term as austerity packages in the West kick-in, we see the structural downtrend in inflation coming to an end. Wages in many emerging markets are now rising rapidly as these economies grow richer and their workers demand higher wages. Also, as the global economy rebalances over the long term, the flows into western government bonds of recent years are unlikely to be repeated.”
Positive Outlook For U.S. Equity (6-12 months)
The outlook for the U.S. economy remains tough, particularly as unemployment is stubbornly high at about 9%, with consumer spending a key driver of growth. However, the U.S. does appear to be seeing stronger growth than other developed economies. This may provide some support to 2012 corporate earnings, at least compared with other developed markets, especially if economic stimulus measures are extended into 2012. Although valuations are somewhat higher than for other developed markets, with a 2012 forecast price/earnings ratio of 10.9 times, we consider this a fair premium given the stronger economic momentum. Political deadlock has been a severe impediment to the US dealing with its budgetary problems, with the country standing alone among major economies in not enacting fiscal austerity. 2012 sees presidential and congressional elections and we would hope that post the primary stages of the contest, which are likely to see candidates appeal to their narrow party bases, they seek common ground and realistic ways of resolving the long-term budget pressures.”
Positive Outlook For EM Equity (6-12 months)
HSBC likes oil and gas rich Russia despite political risks in an election year, sees a soft rather than hard landing in China, and notes that Latin American governments — particularly Brazil — have good balance sheets and plenty of tools remaining to fix the economy.
Powerful longer-term phenomena such as industrialisation and urbanisation, as well as more robust fiscal positions, underpin our positive view on emerging market equities. We continue to see stronger growth from emerging economies compared with developed economies in 2012, albeit at slower rates than previously. Emerging market equities have underperformed developed market equities in 2011. There is some risk that further downward revisions in global growth could lead to them continuing to trade as higher-risk plays rather than reflecting the superior structural features of their economies. However, valuations are attractive with aggregate emerging market equities trading on about 9 times next year’s earnings, against a 10-year average of about 11 times. We favour Chinese equities where valuations are low in our view, with the market trading on about 8.2 times 2012 earnings, significantly below the market’s 10-year average of about 12.5 times. There are risks in that the rapid rises in residential real estate prices could reverse and become destabilizing to parts of the economy, but overall, we forecast a soft rather than a hard landing for the economy and forecast 2102 economic growth of about 8%.”
Negative Outlook On U.S. Treasurys
U.S. government bond yields remain extremely low despite investors losing confidence in the role of political institutions to tackle fundamental budgetary problems. The U.S. Congressional Budget Super Committee failed to reach a bipartisan deficit reduction agreement after three months of intense negotiations, despite a similar political deadlock over the summer leading to the U.S. credit rating being downgraded by one notch by Standard & Poor’s. More positively for treasuries, the Federal Reserve decided to lengthen the average maturity of its treasury holdings by selling $400 billion of short-dated securities and purchasing longer-term bonds. They also committed to keep Fed fund rates low for a longer period of time. Notwithstanding Federal Reserve actions that are currently supporting prices, we remain cautiously negative on US treasuries as an asset class. We believe the positive surprise seen in economic data can continue and should the Eurozone reach agreement on a lasting solution to its sovereign debt crisis, the safe haven premium embedded in U.S. Treasury prices may start to evaporate. This would force yields to rise to levels more reflective of the current economic and fiscal backdrop.”
Article from Forbes