After a 15-year wait, the FTSE 100 finally hit fresh all-time highs last week, a milestone that appears to have catalysed confusion on a grand scale.
“FTSE hitting record high shows global confidence in Britain,” tweeted the Conservatives, apparently oblivious to the fact the Footsie actually slipped last year, only to shoot higher after the ECB embraced quantitative easing. Besides, it is an increasingly global index, UK profits only accounting for a quarter of Footsie revenues.
The Wall Street Journal, Guardian, Telegraph and other media groups took a different tack, asking why it had taken the Footsie so long. After all, Germany's Dax hit new highs in 2013 and had risen 40 per cent since then, they noted. The answer, apparently, is the Footsie's heavy weighting towards mining and oil stocks, and the pounding that followed the commodity crash.
There is a much simpler explanation. Unlike indices in most developed markets, the Dax includes the reinvestment of all dividends. If the Footsie was measured in the same way, it would have hit new highs in late 2010. If one excludes dividends, the Dax remains some 10 per cent below its 2000 high.
The Euro Stoxx 600, France’s CAC 40, Italy’s Mib and Spain’s Ibex 35 all remain shy of all-time highs. Far from being the slow coach, the Footsie is leading the way.
Cape critique misses the point
Nobel economist Robert Shiller (inset) has been shifting out of US equities lately due to the S&P 500's extended cyclically adjusted price-earnings (Cape) ratio. Citigroup's Tobias Levkovich is unconcerned, however, last week citing data showing Cape had "no ability to predict price outcomes a year later".
This, he said, “does not seem to confound the bears, which we find both intriguing and revealing about motive”.
How silly. Shiller, like most investors concerned by elevated valuations, has long admitted Cape is not a market-timing metric. Rather, high readings suggest subdued long-term returns, and indicate better value may be found elsewhere. Studies confirm Cape’s predictive ability over a 10-year period.
Thing is, strategists like Levkovich aren’t bothered.
“Nobody really invests with a 10-year time horizon any more,” he said last year.
That’s not true of pension fund investors and countless others who (rightly) take a long-term approach. Unfortunately, it is true of Wall Street; even after the dotcom and housing crashes, it remains as dangerously myopic as ever.
AO: dotcom to dotbomb
AO World shareholders learned a brutal valuation lesson last week, shares almost halving after the much-hyped British firm issued a profits warning.
AO sells washing machines, fridges and the like, a low-margin world that usually attracts sober valuations.
AO sells online, however, so investors decided it must be sexy; after floating 12 months ago, it was valued at £1.7 billion, or roughly 160 times annual profits.
Then, AO chief executive John Roberts defended the valuation and rubbished the doubters.
“That’s why they are boring traditional fund managers,” he said. “They can’t get it because that’s the way they have always done it. I honestly couldn’t give a shit whether they buy our shares or not.”
The doubters were right, however.
A year ago, we warned that AO was wildly overvalued. Even after last week’s slaughter, it trades on 47 times expected earnings. Be “boring” and “traditional” and continue to steer clear.
Equites: how long to hold?
The longer you hold equities, the greater your chances of a decent return. But how long is necessary? For example, how risky are equities if you have, for example, a five-year investing horizon?
Over the last 114 years, notes the latest Barclays Equity Gilt Study, UK equities beat cash over a two-year period 68 per cent of the time.Interestingly, a five-year timeframe only improves your odds marginally, to 75 per cent.
If you’re looking for a sure thing, wait 10 years (a 91 per cent win rate) or 20 years (99 per cent).
Bonds, too, rarely keep up with equities, but there are exceptions. Remarkably, despite the huge 1990s equity bull market, gilts have beaten UK equities over the last 25 years. Dividends make the difference Do you reinvest your dividends? Do you even care? You should. According to the aforementioned Barclays Equity Gilt Study, £100 invested in UK equities in 1900 would be worth £28,261 in real terms today, assuming dividends are reinvested. Without reinvestment, they would be worth just £184.
The stats are similar, if less dramatic, in the US; since 1926, a $100 equity investment would have grown to either $1,092 or $31,134, depending on which approach you took.
Lots of investors enjoy the income dividends provide. However, long-term investing is all about compounding returns; spending them may be a much more costly choice than it seems.
