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Monevator Private Investor Market Roundup: April 2013

by The Investor on April 11, 2013

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)

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. [↩]

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Warren Buffett’s investing tips (infographic)

by The Investor on April 9, 2013

I quite like this investing infographic explaining how to make money like Warren Buffett. I am a sucker for both Buffett and the Muppets, and he looks a bit like a Muppet mogul who never was here.

I’m even prepared to overlook the errors, such as the glaringly weird one near the top that says Buffett has lived in an apartment for 55 years! Buffett is famously stingy, but he’s not so stingy that he couldn’t bust out for his own roof and yard. Someone clearly wasn’t paying attention when they were Googling. (Spell checker doesn’t like that word. Googling. Wonder how much longer for?)

[Note: Sadly the info-graphic was taken down by its creator in 2019 so I can no longer embed it here, but you can still view it in the Internet Archive.]

Want to know more about Warren Buffett?

Discover how Warren Buffett got rich

Read 7 more surprising things about the man himself

Insatiable, aren’t you? Here are some investing tips from Warren Buffett

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Too big to scale: Long-term stock market returns

by The Investor on April 4, 2013

An inflatable globe of the Earth is an example of bringing big numbers down to size

Always be alert to the different ways in which large numbers can be (mis)interpreted when trying to make sense of the world.

Never forget: You’re an upgraded ape with delusions of grandeur, designed to hunt gazelles and run away from lions. You’re prone to fear and greed, you love being in with the crowd, and you’re afraid of heights and of the dark.

And all this equally well applies when investing – because what else have we got to go on?

We need to quieten the chimp within us to get unemotional about data, in order to invest through the cycles of boom and bust without getting giddy in the good times, or paranoid in the bad.

The view from the stock market’s summit

Let’s consider how a superficial read can mislead us by considering the long-term returns from the US stock market.

Below is a pretty typical graph, of the sort you see in the introduction to many investing books. It shows how the US stock market has risen from the 1930s until a year or two ago:

How do you feel when you look at this graph?

A pretty normal reaction might be: “Oh my goodness, we’re doomed!”

It looks as if the stock market only really got going in the Yuppie era of the mid-1980s. Until then, the City was asleep. How Warren Buffett made his billions seems a mystery, given the near flat line he had to trudge along for most of his career.

In short, we still appear to be in the midst of an enormous stock market bubble that is certain to burst! (Again!)

And indeed I have seen this graph used to make exactly that claim.

Now, this data is not wrong – the US stock market did indeed rise as indicated in the graph.

But if we consider its ascent in the light of various other factors, we may decide we look far less likely to be heading for a nasty fall.

Getting real about returns

The first thing to point out is that this graph shows the nominal price level. That means the data has not been adjusted for inflation.

Considering that inflation tends to run at 2-3% a year, this makes a big difference once compound interest has done its work over several decades.

The next graph is one of several I am going to use from Visualizing Economics.

Again it shows a huge spike in the past three decades for the equity market, compared to what has gone before – this time taking us back to 1880:

Click to enlarge

At first glance you might not see much different about this graph compared to my first graph.

However compare the two more carefully. This time you can clearly see several previous peaks, along with those double stalagmites of the recent highs (tested again, incidentally, since this graph was created in 2010).

By adjusting like this for inflation, we can more easily see the big run-up in stocks that occurred in the late 1960s. This graph also makes plain the 1920s bubble (which was already underway just as the first graph gets going – but even if it were fully shown, it would just look like a blip).

Displaying the market’s ascent in real terms like this helps us see that investors didn’t spend every day asleep at the office until the 1980s. There were plenty of roller-coaster rides on the way.

Tackling those twin peaks

The next and arguably the most crucial adjustment we need to make to the data is to change the scale we use.

Currently, we’re looking at it in a linear scale. This is misleading. Why?

Well, simply by eyeballing the graph above, we can see the US market went up about 50% between 1900 and 1906. That’s quite a move in just six years.

However on the graph as a whole this surge barely registers, compared to those Peaks of Doom to the far right of the graph.

This is because by the time we get to our era, the market is up at levels some 10-20x higher in absolute terms compared to the turn of the century, even after adjusting for inflation.

Again, the data is not wrong, but visually it exaggerates the recent past and tricks us into thinking we’re looking at an enormous and unusual bubble.

We can see this by using a logarithmic scale. With a logarithmic scale, percentage changes appear the same, even if the absolute changes are massively different. Using a log scale, a 50% rise between 1900 and 1906 would look the same as a 50% rise from 2003 to 2008.

Here’s how the long-term US stock market graph looks in log terms:

Click to enlarge

Now we’re getting somewhere!

When looked at in log terms, the stock market return over the last couple of decades – those big twin peaks of recent infamy – look positively ordinary. As indeed they should – due to the bear markets of 2000 and 2008 that wiped out most of the excesses of the late 1990s, stock market returns from 1990 to 2011 were actually below the long-run average!1

For the avoidance of doubt, I am not saying the market wasn’t grossly overvalued in the year 2000, or anything like that.

But I am saying it’s been grossly overvalued and undervalued before.

The inflation-adjusted log graph shows us very clearly how the market has endured all kinds of booms and busts, and also how overall it has marched pretty steadily higher, provided you stand far enough back (and squint a bit!)

Real versus nominal, side by side

If you compare that inflation-adjusted log graph with the very first graph that showed nominal growth in linear terms, I think you’ll agree we’re now seeing a much less scary – and more informative – picture of stock market growth over the long-term.

The next graph illustrates the same point, via two log views of the US market.

The blue line has not been adjusted for inflation, whereas the black line has:

real-versus-nominal-US-stocks-growth-log

I wish I could show the blue line in linear terms, to ram the point home.

Perhaps that’s a project for a rainy day…

Dividends do it again

I’m not quite done yet. These graphs still don’t show the complete picture.

I mean, some of you may feel as deflated as the graphs by now. Why invest in equities, I hear someone cry, if over 120 years you just get a crummy line that limps higher from left to right?

To which a couple of points:

First, the linear graph still shows you how your money would grow – it’s just not as clear as the log graph at showing the rate of change. You still get rich!

Secondly, remember you also get dividends.

Annual dividends are a huge part of the stock market’s total return, and the graphs we’ve seen so far assume you spent all your dividends partying with cads, flappers, hippies, punks, and ravers as the decades rolled by.

What if you sensibly reinvested your dividends for your long-term wealth?

Here’s what:

Click to enlarge

Who wants to be a millionaire? As you can see by the green line, reinvesting dividends makes an enormous difference to your return. Pumped up by dividends, the log graph now looks perky again.

Remember that the visual impact of this return is flattered by compound interest being applied over more than a century. Somebody reading this might have 100 years to live, but such precocious seven-year olds aside, that’s not a realistic investing time frame for most of us.

But by now you know to look twice at any data before reaching a conclusion, right?

Why equities grow over time

One more thing. There are some out there who think the whole stock market is a Ponzi scheme, built on suckers selling paper shares to other suckers, and so forth.

As such, these folk think even the steady growth we see in the later graphs is too good to be true.

I haven’t got much time for these people. Frankly I’m glad they tend to live in the caves and the backwoods of North America. (I get the impression that most of them don’t have much truck with fancy consumer goods such as soap and hot water.)

Nevertheless, it’s important to remind any doubters that there’s a good reason why equities can be worth more over time, even after inflation. And that’s that economies – or at least the one’s we’re concerned about – have tended to grow their GDP over time, too.

As GDP grows, listed companies benefit by expanding their share of business. So there’s a direct (if imperfect) relationship.

And here’s how US GDP grew during the last century and a bit:

Click to enlarge

Woo hoo! We’re going to the moon!

What’s that I hear you say? This is a linear scale, and you’d rather see it in log terms?

Absolutely right – well done young padawan. Double extra pudding for you for paying attention, plus your wish is my command:

Not so crazy now, is it?

The bottom line: Returns can be calculated and illustrated in many different ways, and whoever is doing so may well have an agenda. Meanwhile your first emotional reaction may well be your least reliable one.

Think first, and ask questions later.

20 year annualized real returns to the end of 2011 for US equities were 5.6%, versus 6.6% over the full 86 years for which data is available. Source: Barclays Equity-Gilt study 2012 [↩]

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The Slow and Steady passive portfolio update: Q1 2013

by The Accumulator on April 2, 2013

The portfolio is up 9.93% on the year (to date).

Well now, it probably hasn’t escaped your notice that the markets have been dancing a merry jig since our last check-up in January. Clap your hands and say, “Yeah!”

Everywhere you turn it’s good news, if you like drawing ‘up’ arrows on your graphs:

Our US fund has leapt 20% since the start of the year.

The UK allocation swelled nearly 10% with Europe not far behind.

Even Japan climbed out of the red to put on 17%. Roll those printing presses.

The worst news we had to bear is that our Gilt fund could only manage a 0.25% gain over the last quarter. Not bad considering the hysteria about bond time bombs. Can’t hear any ticking… must be a good sign.

In raw numbers, our little portfolio is up over 17% on purchase, and we’re sitting on a £1,500 cash gain – considerably better than last quarter’s £600.

The portfolio tracker has got more complicated since we've sold several funds. The red annotations show you which funds we still hold.

The portfolio tracker has spawned complications now that we’ve swapped some funds. The funds inside the red boxes are the ones we still hold.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £750 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts here.

It’s impossible not to feel good about the gains even though we know that a rising market is making our next purchases more expensive.

Without doubt, sober-me prefers to buy shares when they’re cheap, but I’m also the kind of chimp who loves a bit of short-term success. I’m sure I’ve been warned about people like me in the behavioural economics books.

Luckily our passive plan is a straitjacket for the senses, or else we’d probably do something daft like sell our gilt funds.

Portfolio management

OK, fun time is over. Now we’ve got to re-enter the world of faffdom that is post-RDR brokers.

Last time, I sold up the majority of our retail funds because online broker TD Direct was touting cheaper clean class funds with nary a sniff of platform fees.

Well, it didn’t take long to discover I’d fallen for the cheap perfume of teaser marketing.

TD will be charging 0.35% platform fees on all funds from August. That means they’re knocked into a cocked hat by the best of our broker comparison table.

So what to do now?

I’ve decided to hold off on a wholesale bail from TD.

That’s because further upheaval is nigh. A decision is due shortly on the banning of commission for execution-only brokers.

If commission is reprieved then any Slow and Steady style portfolio worth under £46,000 would be best off going back to the way things were. That means investing in retail class index funds free from trading fees or platform fees, bought from a platform like Cavendish Online.

If commission is axed then everything is chucked up in the air again. Existing commission-troughing brokers will have until some point in 2014 to bedazzle us with new offerings.

Some industry insiders think we’ll enter a confusing twilight world where commission morphs into fund unit rebates rather than straight cash rebates.

Whatever, it seems unlikely that the best broker and portfolio selection I could make now will still be the best in a few months. Rather than continue to chop and change, we’ll assess the situation again at the next Slow and Steady update.

If you must invest straightaway then you can use the broker comparison table and these portfolio calculations to make a good decision now.

Even if your broker isn’t topping the best-buy tables, you’re better off waiting to see the lie of the land over the next six months than being a broker tart who gets whammy-ed with exit fees on multiple occasions.

All that said, I am going to sell out of the L&G Global Emerging Markets R fund in exchange for the L&G Global Emerging Markets I fund that’s now available with TD Direct.

It’s the same fund but a different share class that more than halves the Ongoing Charge Figure (OCF) from 1.06% to 0.52%.

As our funds are snugly tucked away in an ISA, there aren’t any capital gains tax issues to worry about, and even if there were, our gain is too tiny to trouble our CGT allowance anyway.

New transactions

Every quarter we lob an additional £750 into the maw of the market. Our cash is divided between the funds as per their target asset allocations.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet this quarter.

UK equity

Vanguard FTSE U.K. Equity Index Fund – OCF 0.15% (Stamp duty 0.5%)
Fund identifier: GB00B59G4893

New purchase: £112.50
Buy 0.63 units @ 17751p

Target allocation: 15%

Developed World ex UK equities

Split between four funds covering North America, Europe, the developed Pacific and Japan1.

Target allocation (across the following four funds): 51%

North American equities

Vanguard U.S. Equity Index Fund – OCF 0.2%
Fund identifier: GB00B5B71Q71

New purchase: £187.50
Buy 0.91 units @ 20523p

Target allocation: 25%

European equities excluding UK

Vanguard FTSE Developed Europe ex-UK Equity Index fund – OCF 0.25%
Fund identifier: GB00B5B71H80

New purchase: £90
Buy 0.6 units @ 15074p

Target allocation: 12%

Japanese equities

HSBC Japan Index C – OCF 0.23%
Fund identifier: GB00B80QGN87

New purchase: £52.50
Buy 73.75 units @ 71.19p

Target allocation: 7%

Pacific equities excluding Japan

HSBC Pacific Index C – OCF 0.31%
Fund identifier: GB00B80QGT40

New purchase: £52.50
Buy 19.38 units @ 270.9p

Target allocation: 7%

OCF down from 0.36% to 0.31%

Emerging market equities

Legal & General Global Emerging Markets Index Fund R – OCF 1.06%
Fund identifier: GB00B4MBFN60

Sell: £1005.53

Replaced by

Legal & General Global Emerging Markets Index Fund I – OCF 0.52%
Fund identifier: GB00B4KBDL25

New purchase: £1080.53
Buy 2144.76 units @ 50.38p

Target allocation: 10%

OCF down from 1.06% to 0.52%

UK Gilts

HSBC UK Gilt Index C – OCF 0.17%
Fund identifier: GB00B80QG383

New purchase: £180
Buy 151.13 units @ 119.1p

Target allocation: 24%

OCF down from 0.18% to 0.17%

New investment = £750

Trading cost = £0

Platform fees = £0

Average portfolio OCF = 0.23% down from 0.29%

Finally – if all this seems too much like hard work then you can always buy a diversified portfolio using an all-in-one fund like Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

You can simplify the portfolio by choosing the do-it-all Vanguard FTSE Developed World Ex-UK Equity index fund instead of the four separates. [↩]

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