Equities: Suspended Animation

Rowan Dartington Signature’s managing director Guy Stephens comments on allocating equity sale proceeds in the current low growth environment.

This market is very tedious or maybe it just feels tedious due to all the excitement and volatility in February.  The FTSE100 recovered all the way back to 6,150 by 1st March, a rise of over 11% from the panic-stricken days two weeks earlier.  Ever since then, throughout March and into April, we have wallowed around between 6,200 and 6,050 without any meaningful direction.  The buyers are on strike and so are the sellers.

The problem is, if you sell equities, what do you do with the proceeds?  Cash and fixed interest are for the deflationary fans – a theory that does have some merit in the post-QE low growth environment where the supply of goods and services still exceeds demand.  The situation in Port Talbot right now is a typical example of the incumbent Government feeling pressurised by the electorate to protect jobs and therefore use tax-payers funds to prop up an industry that cannot compete – the EU had called for higher tariffs on cheap Chinese steel to protect what is a strategic industry, but the UK government opposed this.

Whilst having the deepest sympathy for all those involved, this is what has been going on in Japan, China, Russia and elsewhere for years.  The state keeps businesses alive which therefore maintains the supply of whatever good is produced which fuels downside pricing pressure and undermines profitable growth and productivity.  For years, Japan propped up their banks which meant vast swathes of the Japanese economy survived but were commercially unviable and therefore prices continued to fall and deflation persisted for 20 years and remains today despite vast quantities of QE.

Whilst there is some merit in the deflationary theory, this does not yet apply to developed western economies which is where most UK investors are exposed.  US, UK and European core inflation is moderately positive and in the case of the US, rising quite steadily such that it may well justify an interest rate rise on its own merits in June, which now appears to be the odds-on favourite.  This therefore works against allocating your equity sale proceeds to cash and fixed interest as the returns would appear to be slightly positive at best.

Commercial Property has been attractive for some time and remains so, for the time being, but the ‘bricks to clicks’ revolution in the retail sector is causing many retailing tenants to reappraise their estate with regard to how their customers will transact business.  Sainsbury’s has clearly made a decision on this by acquiring Argos for its distribution infrastructure and non-food product range.  This implies that food home delivery is seen as the growth market and this needs to be delivered from warehouses not from stores where the goods are picked from the shelves as if the customer was there himself.  Morrison and Tesco are shrinking their store footprint as well as B&Q, again reacting to the customer’s move to digital retailing.

So, investment in Commercial Property is still looking good for now as there is not yet any sign of pricing weakness, UK economic growth is reasonable and yields do not suggest a bubble.  However, returns are likely to be more modest than in the past few years and this should be borne in mind when making a fresh investment from here.

So, that leaves equities.  If you sell equities today in any meaningful way then you are probably only looking to get back in at lower levels in the short term rather than protect yourself longer term from some event that hasn’t as yet been thought of in this paranoid, negative environment.  Also, buying the equity market today flies in the face of ‘Selling in May …. and going away’, the Brexit vote and a US earnings season likely to be rather weak, which kicks off today.  Dividends are probably the best source of return so long as you steer clear of the energy sectors which are still feeling the pain even though commodity prices are off the lows.

And finally, on a lighter note.  Whilst watching the Masters at Augusta I had a really scary thought.  If we leave Europe, no Ryder Cup!

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