I’m very pleased to welcome back RIT, with his latest roundup of the past three months’ movements in the most important asset classes. When not generously crunching numbers for Monevator, he runs Retirement Investing Today. Take it away RIT!

There have been some big moves over the past quarter in many of the markets we track – markets that we’ve chosen to help us understand our portfolios’ moves, and maybe to flag up a bargain!

These latest market shifts might have been caused by:

• Mario Draghi, the ECB president, telling us he will do “whatever it takes” to save the Euro.

• Ben Bernanke, US Fed chairman, announcing QE3. (Or should that be QE Infinity? I can’t find a reference to any eventual limit to the $40 billion that Bernanke will create every month to buy mortgage-backed securities).

• No new UK government initiatives to support house prices, other than Nick Clegg’s proposed pension for property plan.

• UK company earnings falling – by my calculations they look to be down about 7% quarter-on-quarter.

• Poor wheat harvests in the UK and US, as well as drought in the US leading to a predicted 30% drop in the soya bean harvest.

I definitely don’t claim to know everything that might be moving the markets (more the opposite!) so if you’d finger any other macro events that occurred over the past quarter, please do share them 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’m just an Average Joe and I’m certainly not a Financial Planner.

Your first time with this data? Please refer back to the first article in this series for full details on what assets we track in the Private Investor Market Roundup, and how and why.

International equities

Our first stop is stock market information for ten key countries1.

The countries we highlight are the ten biggest by gross domestic product (GDP). They also represent the countries that a reader following a typical asset allocation strategy will probably allocate most of their funds towards.

Here’s our a snapshot of the state-of-play with each country:

The prices (i.e. the various stock market levels) shown in the table are the FTSE Global Equity Index Series for each respective country, taken on the first possible day of each quarter.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: In price terms Germany is the best performer, both quarter-on-quarter and year-on-year, rising 12.9% and 29.1% respectively.

• Worst performer: Japan took this dubious honour. The stock markets of all the other countries we track are up nominally both on a quarter-on-quarter and year-on-year basis. But Japan saw small falls of -2.1% and -1.3% respectively.

• P/E rating: Italy saw big P/E increases, up 26.2% on the quarter and up 62.1% on the year. This comes on the back of its market rising over those periods by 7.5% and 3.4% respectively – a disparity that tells you that the earnings of Italy’s companies are falling fast. Japan saw its P/E drop 2.1% quarter-on-quarter, but rise 2.2% year-on-year.

• Dividend yields: If you’re saving for the long term, whether it be for retirement or some other long term goal, dividends matter. Italy currently has the largest dividend yield at 4.4%. However this is down 10.2% on the quarter. France also saw its dividend yield fall – it’s down 17.4% on the year.

Remember that – all other things being equal – falling prices increase dividend yields. So rising yields aren’t necessarily good news for existing holders, since they usually indicate prices have fallen.3 A higher yield might indicate a more attractive entry point for new money, however.

With Francois Hollande’s socialist government in France recently announcing an additional EUR10 billion of taxes on business in 2013, we could see dividend payouts cut, and hence dividend yields potentially fall further in that country.

Of course, French share prices could also fall to compensate. That’s because instead of EUR10 billion of earnings going to either company re-investment, which could help French shares in the longer term, or else being returned to the shareholder as dividends, we will instead see the money simply siphoned off to the French government.

The largest increase in dividend yield came from Russia, where the yield was up 5.1% quarterly and 57.7% yearly. This is an usual case, where the large increase in yield has come about because of far higher dividend payouts from Russian companies – at the urging of President Vladimir Putin.

Longer term equity trends

To see how our ten countries are performing price wise over the longer term, we track 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 since then, in inflation-adjusted terms:

The graph reveals that in real (inflation-adjusted) terms, not one of the countries we follow has yet seen its stock market rise to new real highs.

The US is closest at 92.7. Italy has done the worst, at 32.6.

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 not familiar with it, you can read more about the cyclically-adjusted PE ratio elsewhere on Monevator.

The charts below detail the CAPE4, the P/E, and the real, inflation-adjusted prices for the FTSE 1005 and the S&P 5006.

 

Some thoughts:

• Today the S&P500 P/E (which includes some estimates) is at 16.2, while the CAPE is at 21.5. This compares to the CAPE long run average of 16.5 since 1881. This could suggest the S&P500 is overvalued by 30%, which is up slightly on last quarter’s overvaluation estimate of 29%.

• The FTSE100 P/E (again using as reported earnings) is 11.2 and the CAPE is 12.0. Averaging the CAPE since 1993 reveals a figure of 19.2. This could suggest the FTSE100 is undervalued by 37%.

I personally use the CAPE as a valuation metric for both of these markets, and use the CAPE data to make investment decisions with my own money. I put my money where my mouth is!

On the other hand, some investors are skeptical about the usefulness of the CAPE.

House prices

A house is the largest single purchase that most Monevator readers will ever make. Property is also a big influence on other sectors of the economy, and rising prices are seen as a key ingredient in the so-called ‘feel-good factor’ (although those shut out by higher prices might feel less jolly…)

For this roundup, I calculate the average of the Nationwide and Halifax house price indices, as follows:

If you don’t already own a home, the quarterly news is all good, with prices down 0.9%. Annually the news is also good – prices over the year are also down 0.9%.

If you own a property, you’re probably not so thrilled.

The next house price chart shows a longer-term view of my Nationwide-Halifax average. I adjust for inflation, to show a true historically-leveled view:

In real terms, house prices continue to fall. House prices are now back to approximately February 2003 levels.

In my opinion these nominal and real falls are good news. I believe the market is still-overvalued, although I’m sure the majority of the British public don’t necessarily agree.

If falling prices continue (or even accelerate) we might one day see the UK property market return to normality, with sensible transaction volumes and first-time buyers able to enter the market without schemes like the Lib Democrats’ ‘pension for property’ scheme that I mentioned earlier.

Nick Clegg’s scheme is in my opinion just another lame attempt to shore up the property market. If it goes ahead, my feelings go out to those unfortunate first-time buyers who either don’t have parents, or whose parents don’t have a pension pot to raid. I just wish the UK government would leave the property market well alone.

I’ll stop there or this could turn into a rant. I can get away with that on my own blog, but I’m sure The Investor won’t let me get away with it on his!

Commodities

Few private investors trade commodities directly. However commodity prices will still affect you, and your investments.

With that in mind, I’ve selected five commodities to regularly review. They are the top five constituents of the ETF Securities All Commodities ETF, which aims to track the Dow Jones-UBS Commodity Index.7

Quarter-on-quarter we see soya bean prices rose a substantial 19.6%, and annually we see them up 24.2%. Natural gas also saw some big moves, up 16.6% on the quarter, but down 30% annually.

My preferred commodity for investment purposes is gold. That’s not because I’m a gold bug, but because I don’t want to worry about contango/backwardation, and because I don’t own (and don’t want to pay someone who does own) a tanker, silo, or a large warehouse!

Gold is down 7.4% year-on-year.

Real commodity price trends

Much as I did with equities, I have created a Real Commodity Price Index that we can track over the long-term.

This index looks at commodities priced in US dollars, is corrected for inflation so that we can see real price changes, and resets the basket of five commodities to the start of 2000.

You can see that gold continues to be the star performer since 2000 – it’s up over 400%. On the other hand the under-performer, natural gas, remains below par at 86.5.

Wrapping up

So that’s the second Monevator Private Investor Market Roundup. I hope it’s given you a small insight into the market’s trials and tribulations over the previous quarter. As always it would be great to hear your comments if you have anything to share.

Finally, as I always say on my own blog, please Do Your Own Research.

For more of RIT’s analysis of stock markets, house prices, interest rates, and much else, visit his website at Retirement Investing Today.

1. Country equity data was taken as of the first possible working day of each month except for October 2012, which was taken on the 28 September 2012. [↩]
2. Published by the Financial Times and sourced from FTSE International Limited. [↩]
3. High yields can also indicate higher dividend cash payouts by companies, which act to increase the yield even if the price stays the same. [↩]
4. Latest prices for the two CAPEs presented are the 28 September 2012 market closes. [↩]
5. UK CAPE uses CPI with September and October 2012 estimated. [↩]
6. US CPI data for September and October 2012 is estimated. [↩]
7. The data itself comes from the International Monetary Fund. [↩]

Ever since we started tracking the Slow & Steady portfolio, I’ve been able to fill up my notepad with pages of economic woe between updates.

And even though real news – such as which semi-naked royal has been caught in front of a zoom lens this time – is now making a comeback, my trusty misery detector tells me:

• The US economy grows like a malnourished child whose mum smoked 60 a day during the pregnancy.

• Europe and the UK continue to wallow in recession, while Spain dithers over its bailout.

• Food prices are on the rise after US crops wilted during the summer drought.

• Petrol prices tick up every time the Israelis and Iranians beat their chests.

• Emerging market growth has sagged.

But all that creeping doubt was blown away by Draghi’s promise to hoover up European debt, the Fed priming the QE3 pump, and Britain coming third in the Olympic medal table.

How else do you explain the Slow & Steady portfolio’s surge to an all-time high of a 5.22% gain since purchase? That’s a year-to-date gain of 7.45% and a 14% improvement on the situation 12 months ago.

If we fancied a Demi Moore-style roll in our riches, then we’d be smothering ourselves in a pile £391.77 deep!

These are heady days, my friends.

The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. 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.

Still, the annualised gain of 2.56% means we’re down after inflation. That means we’re not doing any better than an instant access savings account.

Hey, where did Demi go?

We must learn to enjoy this period of stagnation as an exercise in self-discipline, remembering Warren Buffett’s observation that, “The stock market is designed to transfer money from the active to the patient.”

News slash

One development I was hoping for was a cut in our cost base, after HSBC announced major price slashery for its index funds.

However, as usual, the investment picture is about as clear as a smartphone contract covered in mud. HSBC have not cut the Ongoing Charge Figure (OCF) – the new name for TER –  for the retail index funds we’re familiar with in the Slow and Steady portfolio.

Instead, they’ve created a new incarnation of their index funds, called the C class. The OCFs are very low – try 0.18% for the FTSE All Share index C fund.

DIY investors can get these funds from some execution-only brokers that use Cofunds to power their platform.

So far, I’ve found the C class funds via Clubfinance and Commshare. However, other Cofunds platforms like Cavendish Online and Bestinvest aren’t registering the C class online yet.

This may change and you may get a better result if you phone directly. I’m going to do some more digging into this and report back next week.

However the whole point of the C class is that HSBC have stripped out any allowances for platform fees from the OCF. That’s why the funds are so cheap, that’s why they’re referred to as ‘clean’. (Hmm, that’s probably what C class stands for?)

I personally find it difficult to believe that any platform isn’t going to levy some kind of fee on top for hosting these funds. Otherwise they’re not going to make any money.

So until the confusion fog clears, the Slow & Steady portfolio will stick with the regular retail versions of the HSBC index funds. And, sadly, the OCF has actually crept up on all six of our equity funds. The average OCF of our portfolio is now 0.37%, up from 0.35%.

That’s still going to be cheaper for most small investors than the Vanguard LifeStrategy ready-made option, once you take into account platform fees. But the gap is closing.

Incoming

On a cheerier note, we were blessed by the chinkity-chink of tiny dividends rolling into our kitty.

The Slow & Steady Portfolio is invested in accumulation funds that automatically reinvest our dividends, but it still helps to know that we’re benefiting from a little corporate largesse every now and then.

Our funds yielded the following payouts last quarter:

• HSBC American Index: £24.98
• HSBC European Index: £28.40
• HSBC FTSE All Share Index: £23.86
• HSBC Japan Index: £6.28 (Wow. Thanks, Japan)
• HSBC Pacific Index: £9.80
• L&G All Stocks Gilt Index: £19.43
• L&G Global Emerging Markets Index: £15.20
• Total income: £127.95

Comparing that £127.95 payout against our total portfolio gain of £391.77 (which includes our reinvested income) only serves to underline the importance of dividends to a portfolio’s growth story.

New purchases

Every quarter we offer another £750 to the money gods.

UK equity

HSBC FTSE All Share Index – OCF 0.28%
Fund identifier: GB0000438233

New purchase: £125.13
Buy 34.8937 units @ 358.6p

Target allocation: 19%

OCF has gone up from 0.27% to 0.28%.

Developed World ex UK equities

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

Target allocation (across the following four funds): 49%

North American equities

HSBC American Index – OCF 0.3%
Fund identifier: GB0000470418

New purchase: £204.67
Buy 96.1788 units @ 212.8p

Target allocation: 26.5%

OCF has gone up from 0.28% to 0.3%.

European equities excluding UK

HSBC European Index – OCF 0.35%
Fund identifier: GB0000469071

New purchase: £41.93
Buy 9.3879 units @ 446.6

Target allocation: 12.5%

OCF has gone up from 0.31% to 0.35%.

Japanese equities

HSBC Japan Index – OCF 0.33%
Fund identifier: GB0000150374

New purchase: £70.92
Buy 124.8750 units @ 56.79p

Target allocation: 5%

OCF has gone up from 0.29% to 0.33%.

Pacific equities excluding Japan

HSBC Pacific Index – OCF 0.46%
Fund identifier: GB0000150713

New purchase: £27.90
Buy 11.881 units @ 234.8p

Target allocation: 5%

OCF has gone up from 0.37% to 0.46%.

Emerging market equities

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

New purchase: £66.863
Buy 148.0580 units @ 45.16p

Target allocation: 10%

OCF has gone up from 0.99% to 1.06%.

UK Gilts

L&G All Stocks Gilt Index Trust: OCF 0.23%
Fund identifier: GB0002051406

New purchase: £212.6006
Buy 114.24 units @ 186.1p

Target allocation: 22%

Total cost = £750

Trading cost = £0

Platform fees = £0

Average portfolio OCF = 0.37% up from 0.35

A reminder on rebalancing: This portfolio is rebalanced to target asset allocations every quarter, mostly using new contributions. It’s no problem to do this, since the vanilla index funds we’ve gone for do not incur trading costs, so long as you choose the right platform.

Take it steady,

The Accumulator

Good reads from around the Web.

Next week my co-writer The Accumulator is back from his month-long blogging holiday (as opposed to a real holiday – we know he only enjoys short breaks to abandoned seaside towns in the North).

To celebrate his return, I’ve decided to reformat these regular Saturday links in order to separate the passive and active articles.

While The Accumulator tells me he enjoys reading (and presumably chuckling over) the active stuff – in fact, he thought I shouldn’t turn the blog into a passive-only site when I mooted it earlier this year – I do worry the active links are noise for sensible index investors focusing on the really important stuff like asset allocation, cutting costs, and counter-party risk. And getting out more.

So for a while at least, I’ll try splitting these out, for both the blog links and the mainstream media links, to facilitate easier scanning.

Doing so does remind me how few passive articles there are for UK investors. No wonder our passive investing HQ is so popular!

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