RIT is back with his roundup of the key asset class moves over the past three months. He also runs his own website, Retirement Investing Today, which has lots more data to digest.
It’s been an exciting quarter for the markets. The FTSE 100 charged out of the New Year blocks, rising 5.3% by 1 February – though by the close on 5 April that had turned into a more subdued gain of 3.7%.
I can see little justification for the increases in UK share prices if I just look at company performance, given earnings at FTSE 100 companies continued to fall. US earnings look flat, too. (Editor’s note: Remember that the stock market is forward-looking, so investors may be predicting higher earnings to come).
Interesting events in the period included:
- The near-collapse of the Cyprus Banking System. I will make two points. Firstly, the handling of the situation by the powers-that-be can only be described as an omnishambles. Secondly, this poor handling has, in my opinion, allowed us to see that deposit protection schemes like the UK’s £85,000 Financial Services Compensation Scheme will not necessarily protect you in the times they were designed for.
- The latest central bank stimulus package, this time by Japanese Central Bank, which will purchase 50 trillion yen (£350 billion) worth of government bonds. That’s £2,738 on behalf of every man, woman and child in Japan, and is equivalent to 10% of Japan’s GDP. Is it just a coincidence that Japan’s government deficit also happens to be about 10% of GDP, meaning they have their bond buyer for the next year already in the bag?
- The 2013 UK Budget. A pretty dull affair except for the Help to Buy Scheme. It will be interesting to see what effect this has.
To give the government the benefit of the doubt, the fact that the first portion of Help to Buy, the equity loans, are targeted at new builds, is possibly the government trying to encourage an increase in the UK housing stock through demand for new builds. Something we badly need in this great country – and also something clearly beneficial to new build property developers.
But I’m a glass half-empty person and so I wonder if it will also encourage a negative – sub-prime loans – that we know all too well from the US housing downturn of a few years ago.
Under both of the Help To Buy schemes, the borrower will be on the hook for 5% of the purchase price and the UK taxpayer for a further 20%, so we will have to see price falls of 25% before the banks feel any pain. Safe in this knowledge – and given that banks exist solely to make profit – will they relax their lending criteria, given they get the revenue upside but don’t carry so much risk?
Please do share any thoughts you have on this or any of the macro events of the last quarter with other Monevator readers in the comments below.
Disclaimer: I must point out that what follows is not a recommendation to buy or sell anything, and is for educational purposes only. I am just an Average Joe and I am certainly not a financial adviser.
Your first time with this data? Please refer back to the first article in this series for full details on what assets we track, and how and why.
International equities
Our first stop is stock market information for ten key countries1.
The countries highlighted in the image (which you can click to enlarge) are the ten biggest by gross domestic product. They also represent the countries that a reader following a typical asset allocation strategy will probably direct their funds towards.
Here’s our snapshot of the state-of-play with each country:
(Click to enlarge)
The prices shown in the table are the FTSE Global Equity Index Series for each respective country.2 The prices in the table are all in US Dollars, which enables like-for-like comparisons across the different countries without having to worry about exchange rates between them.
The Price to Earnings Ratio (P/E Ratio) and Dividend Yield for each country is as published by the Financial Times and sourced from Thomson Reuters. Note that these values relate only to a sample of stocks, albeit covering at least 75% of each country’s market capitalisation.
Here’s a few interesting snippets:
- Best performer: Price-wise Japan was the best performer over the quarter, rising 11.2%. It’s likely a large portion of this was caused by the stimulus announcement I mentioned above. Year-on-year the honour goes to the US. It’s up 9.7%.
- Worst performer: China takes this wooden spoon, with its market falling 11.0% quarter-on-quarter.
- P/E Rating: On the back of share prices rising even as earnings have fallen, the UK has seen a big P/E increase – up 14.1% on the quarter. The multiple on the UK market has now risen 37.7% year-on-year – which means its 37.7% more expensive, all things being equal. China on the other hand saw its P/E fall 7.1%, quarter-on-quarter.
- Dividend Yields: If you are saving for the long term, whether it be for retirement or some other long term goal, dividends matter. Russia, if you’re a brave investor, now has the largest dividend yield from this group, at 4.5%. We don’t include it in our roundup, but if you’re after dividend yield you might consider a less adventurous choice, Australia, where the MSCI Australia Index is yielding around 4.3%.
Remember that falling prices usually increase dividend yields. So rising yields aren’t necessarily good news for existing holders, since they most often indicate prices have fallen. A higher yield might indicate a more attractive entry point for new money, however.
Longer term equity trends
To see how our ten countries are performing price wise over the longer term, we use what we call the Country Real Share Price.
This takes the FTSE Global Equity Price for each country, adjusts it for the devaluation of currency through inflation, and resets all of the respective indices to 100 at the start of 2008.
Here’s how the countries have performed over the five years since then, in inflation-adjusted terms:
(Click to enlarge)
The graph reveals that – in real terms – we are still in the situation where not one of the countries has seen its market reach new highs.
The US is closest at 99.3, while Italy is down even further on the quarter (or got even cheaper, if you’re a contrarian investor!) at 32.7.
Spotlight on UK and US equities
I couldn’t talk about share prices without looking at the cyclically-adjusted PE ratio (aka PE10 or CAPE). If you’re unfamiliar with these terms, you can read what the cyclically-adjusted PE ratio is all about elsewhere on Monevator.
Below I show charts that detail the CAPE3, the P/E, and the real, inflation-adjusted prices for the FTSE 1004 and the S&P 5005.
(Click to enlarge)
(Click to enlarge)
Some thoughts:
- Today the S&P 500 P/E (using as reported earnings, including some estimates) is at 17.2 and the CAPE is at 22.0. This compares to the CAPE long run average of 16.5 since 1881. This could suggest the S&P500 is overvalued by 33%, which is identical to last quarter’s overvaluation estimate.
- The FTSE 100 P/E (again using as reported earnings) has risen considerably to 13.6 and the CAPE is 12.6. Averaging the CAPE since 1993 reveals a figure of 19.3. This could suggest the FTSE 100 is still undervalued by 35%.
I personally use the CAPE as a valuation metric for both of these markets and use the CAPE data to make actual investment decisions from using my own money. Other traders and investors are cynical about the usefulness of the CAPE.
House prices
A house is probably the largest single purchase that most Monevator readers will ever make. It’s therefore worth looking at what is happening to prices.
In the roundup I have chosen to calculate the average of the Nationwide and Halifax house price indices, as follows:
(Click to enlarge)
If you are a home owner then the quarterly news is good, with prices up £2,197 or 1.4%. Of course if you’re already priced out then home ownership just moved a little further from your grasp.
I believe this latest move was largely driven by one of the other Government schemes currently running in the UK, the Funding for Lending Scheme, which has now driven average two-year real (i.e. inflation adjusted) fixed rate mortgages to negative levels. I believe house prices are driven by affordability, and that is largely influenced by mortgage rates.
Annually the news is more subdued, with prices up 0.6%.
The next house price chart shows a longer-term view of this Nationwide-Halifax average. I adjust for inflation, to show a true historically leveled view:
(Click to enlarge)
In real terms housing continues to fall, with prices back at approximately October 2002 levels.
I continue to believe the market is overvalued, although I’m sure the majority of the British public don’t necessarily agree with me. That said, I am starting to see similar views expressed in the mainstream media now and then.
The schemes prior to Help to Buy have helped make houses affordable, but this has occurred even as volumes have fallen through the floor. It will be interesting to see if Help to Buy helps transaction volumes, given that a lot of what would have been bank risk will now be transferred to the taxpayer, possibly encouraging looser lending practices.
I personally wish the UK government would stop propping up this market and enable it to adjust to the free market price. But for every one of us with this wish, there are plenty on the other side of the fence.
Commodities
Few private investors trade commodities directly. However commodity prices will still affect you, and maybe your investments.
With that in mind, I’ve selected five commodities to regularly review. They were chosen based on them being the top five constituents of the ETF Securities All Commodities ETF, which aims to track the Dow Jones-UBS Commodity Index.6
(Click to enlarge)
Quarter-on-quarter we see natural gas up a large 13.4% and year-on-year an even larger 75%. I’m not surprised at this, given how natural gas prices had lagged the other commodity price increases that we track.
My preferred commodity for investment purposes is gold. It’s down 5.5% on the quarter, which has caused me to buy some more for my own rule-driven investment portfolio.
Real commodity price trends
My Real Commodity Price Index looks at commodities priced in US dollars, is corrected for inflation so we can see real price changes, and resets the basket of five commodities to the start of 2000.
(Click to enlarge)
Even after its recent falls, gold continues to be the star performer – it’s up to an index value of 404 from 100.
On the other hand, as mentioned above, the under-performer is natural gas. It is just above par at 114.
Wrap Up
So that’s the fourth Monevator Private Investors Market roundup. A lot of data which I hope gives a small insight into the market’s trials and tribulations over the previous quarter. As always it would be great to receive comments or thoughts below.
Finally, as I always say on my own site, please Do Your Own Research.
Check out RIT’s previous investor roundups, or for more of his analysis of stock markets, house prices, interest rates, and much more, visit his website at Retirement Investing Today.
- Country equity data was taken as of the first possible working day of each month except for April 2013, which was taken on the 5 April 2013. [↩]
- Published by the Financial Times and sourced from FTSE International Limited. [↩]
- Latest prices for the two CAPEs presented are the 5 April 2013 market closes. [↩]
- UK CAPE uses CPI with March and April 2013 estimated. [↩]
- US CPI data for March and April 2013 is estimated. [↩]
- The data itself comes from the International Monetary Fund. [↩]
I’ve been wondering whether a good geezer’s portfolio would consist largely of the shares of companies who supply the goods and services that dominate cPI (codgers’ price inflation). Thus I’d hedge against the prices of water, elec and gas with shares in Severn Trent, etc, etc.
For food, what? Agricultural commodities ETFs perhaps, rather than shares? For petrol, what? Oil ETF?
I wish I knew how to hedge against rises in Council Tax.
I’m also a big fan of CAPE. I wonder if we could use the ratios of the US and FTSE CAPEs to create a tactical asset allocation strategy that would allocate more money in the “cheaper” market.
@rjack — That’s pretty much what RIT does on his blog and with his own money.
We have something in Canada that’s similar to your Help to Buy, it’s called Canadian Mortgage and Housing Corporation (CMHC), sort of similar to Fannie Mae and Freddie Mac. CMHC provides insurance protection to banks that lend out mortgage, so basically transferring bank risks onto taxpayers; a moral hazard.
Originally CMHC provides a limit of $200 billion of insurance, but out stupid government, after the financial crisis, decided to increase that up to $600 billion. The results: cheaper and easier money from banks because they are covered by taxpayer money, looser lending practice to young people who have no business buying a house in the first place.
We also had 0/40 (down payment/years of amortization), then 5/35, and finally 5/30 loans over the last 5 years, as the government tried to slow down the bubble. The lowest 5 year floating rate once reached 2.89%. Down payments can be a gift from parents, or even be put on your credit cards. Banks even suggest to people (who obviously are idiot in their personal financial departments) to open up a LOC with the banks issuing mortgage, so that they can get that 5% down payment.
That seem all nice and rosy when you see houses in Vancouver, and Canada in general, rocketed to stratospheric level. Last year, an average house in Vancouver is 12X the annual income of a family (2 working adults) PRE-TAX. Yet, people were all eager to jump into RE like lemmings, since the battle cry from the perfidious RE agents was “Buy NOW or forever be priced out.” Vancouverites also have a self deceiving notion that it’s the “Best Place on Earth”, and that people will always want to live in Vancouver, thus driving house price up in an exponential trajectory. “It’s different here” was heard from economists working for banks, developers, RE agents, and even Joe Average.
We are now seeing the RE bubble bursting in Canada, since housing is no longer affordable and 70% of us own a dwelling already, there are no new buyers to entice into the market. As we are seeing the beginning of a bubble burst, not a soft landing as the majority of Canadians hoped, I’m sitting on the sideline, practicing my best imitation of Nelson Muntz from The Simpsons, “Ha Ha!”
> I wish I knew how to hedge against rises in Council Tax.
I’d like to know that too. Though turning up to vote om May 2 might help. It is the worst uncontrollable fixed cost I have at present.
> good geezer’s portfolio would consist largely of the shares of companies who supply the goods and service
You need to hold a lot of shares in the energy companies to match your power bill with the divi, have you correlated whether the dividend + SP rise tracks the price rises?
I find the whole handling of the Cyprus banking event …disturbing. Seeing banana republic style bank holidays, confiscations and capital movement controls isn’t something I had expected to see in the EU. The “It’s Russian oligarch’s money ” line was very thin too.
I’m still mulling over the personal implications; but I think we need to be aware of the international reputation of our (UK) financial institutions, before concluding we are not Cypriots.
On a somewhat related note there was considerable movement in Gilts over the last few months that might be worth a mention.
@ dearieme
I’m working towards building a HYP which might give a bit of a hedge against water, electricity and gas. That’s because it’s unlikely you could build one without owning utility and energy companies. I’m just starting out and already own SSE and VOD with RDSB as one of the next likely purchase candidates. If a HYP might be of interest there are a couple of good boards over at the Motley Fool. Please though before you start looking at agricultural commodity or oil ETF’s look up/understand contango/backwardation.
@rjack
TI is right. I’m playing the CAPE game with nominally 54% of my portfolio. A now not insignificant sum. I use the S&P500 CAPE for my International (40% US, 40% Europe and 20% Japan), ASX200 CAPE for my Australian and FTSE100 CAPE for my UK Equities. The method I use is just an asset allocation that follows a proportional relationship dependent on how far CAPE is from the long run average. CAPE + 10 = nominal asset allocation + 30%. I am fully transparent with this on my site.
@Nathan
Good point on the Gilts front. The majority of the low risk portion of my portfolio are held in Index Linked Gilts and NS&I ILSC’s. Those Gilts are up 13.7% since the 05 January.
Cheers
RIT
@nathan > The “It’s Russian oligarch’s money ” line was very thin too.
That was rough. In the end the principle of innocence until proven guilty was given a kicking there, and it’s disturbing to see such essential precepts of Enlightenment thinking getting sloughed off without much thought. If they nicked it, do ’em. For nicking it, not having it….
@RIT > I’m working towards building a HYP which might give a bit of a hedge against water, electricity and gas.
I have my eye on RDSB too. And it’s interesting that in a HYP you almost end up hedging utility bills by definition. Though it’s a reasonable sized ask to hedge these bills in terms of paying them from the divi 😉
@ermine
RDSB currently sitting on a forecast dividend yield of 5.5% against a FTSE100 yield of circa 3.5%. So certainly meets the definition of a HYP at the moment. CLLN and IMT also towards the top end of my watch list.
Great insight and roundup. I’d be interested to know where you think certain aspects of Japan’s economy are headed in the long term.
Comment regarding bank deposit insurance.
A bank run can occur because the bank does not keep enough money on hand to pay all depositors at once – it loans their funds out to others.
But in our current monetary system the deposit itself is the money – no-one expects to have a claim on a lump of Gold sitting in the vault – the numbers in the account are all there is and there is no way the bank can run out of those.
Banks must always be able to cover deposits, because the deposits themselves are wealth. They don’t represent a liability to the bank.
A bank might however go bankrupt by borrowing through other methods.
Mike,
about Japan:
The Japanese government is attempting to boost the economy by boosting the price of government debt, the stock market and real estate. At the same time they are planning to raise taxes on ordinary people by doubling consumption tax.
So basically the hope is that deliberately generating a bubble in asset prices will boost confidence sufficiently to spark economic growth, just hope that no-one notices that they have less money to spend and that their pay is still falling.
Also, hope no-one questions the inflated value of real estate, capital in a society with a rapidly falling population…
Personally, not convinced it’s an entirely sensible idea, but I suppose it’ll be to someones advantage.
@Mark — Deposits absolutely represent a liability of a bank. If they did not, then we would not have bank runs. Similarly, loans made by a bank are assets.
OK, in the accounting sense it might be a liability, but it is a liability which by definition creates its own 100% reserve – meaning that there is no danger that a bank can default on deposits.
It is not a “liability” in any real sense.
I’d love to see a graph of house prices against earnings. The graph above only compares houses against other commodities. A graph against earnings would indicate relative affordability, and thus perhaps give sine clues about future house prices.