Buy shares before prices catch up with profits
Share markets have failed to reflect growth in corporate profits for so long, and to such a high degree, that solid arguments exist now to increase equity allocations, according to Swiss manager Sarasin & Partners.
A number of European investors might agree with the doubters, at least based on the past ten years, as European shares made just 0.5% per year. In Germany, the continent’s largest consumer market, such returns lost out to both inflation (1.6%) and government bonds (5.6%).
Sarasin notes that from 1945, US companies have grown profits consistently above inflation, measured over rolling five-year periods, except for at one point around 1970. Over the same time span, they have also grown their dividends without a single falling five-year period.
But for the first time since the 1950s, yields on equities are higher than yields on government debt, reflecting extreme risk aversion and an opportunity to buy, says Richard Maitland, the London-based head of charities at Sarasin & Partners.
Price earnings ratios are not yet back to their levels of the 1970s, when they traded at about four times expected earnings. But nor are they at unrealistic levels of 30 and above, which they reached in the dot-com days of the late 1990s.
Maitland adds: “There has been nothing wrong with the profits being produced by companies over the past 30 years. But we have been devaluing those profits more and more, so that now the [UK] PE ratio is about 10.5 times. Starting with that kind of PE, it is more sustainable and we are now below the average for the first time in a long time.”
Maitland says the way to invest successfully in equities is “to ensure that you are not a forced seller, so you can invest long term and ride out the volatility because what you spend is just the income”.
However, he suggests from present levels, the markets, more than manager selection, are the key driver behind investors’ returns.
“Now maybe you will not have to take so much manager risk – you can let the market do more of the work,” he says.