Scramble for yield favours high income global equities
If investor sentiment in 2012 was characterised by a flight to the safe haven of cash and bonds, 2013 is likely present new and different challenges, as interest rates remain at historically low levels and cash struggles to provide acceptable returns.
Battle weary investors are starting to look further afield and ask where the smart money can find outperformance now.
The answer could well be high yielding global equities, says Stephen Thornber, Portfolio Manager at Threadneedle Investments.
“In the current low yield world, the right global equities have the potential to give investors both a stable source of income, as well as potential capital growth,” he says, “and for investors looking for a reason to exit the save haven assets, that’s a heady mix.”
Mr Thornber explained that the move to cash in 2012 was the result of investors trying to mitigate the risks associated with three key global themes; the fiscal cliff, the effect of the leadership transition in China, and the drag of the Eurozone crisis.
“Any uncertainty unsettles markets, and investors were understandably attracted to the safety of cash and bonds,” he said.
This year however, the situation is quite different. Mr Thornber explained that as 2013 unfolds, fears of impending doom are starting to abate.
“There is increasing optimism about the global economy,” he explained “a compromise was reached on the fiscal cliff, concern over the Eurozone is starting to ebb, and signs are emerging that the Chinese economy is picking up pace.”
However, interest rates remain at historically low levels, and with global economic growth still sluggish, this is unlikely to change in the near future. Cash will not be able to provide the high returns and income that investors, particularly those heading into retirement, are looking for. All of these factors have combined to encourage investors back into risk assets such as equities as a means of taking advantage of the potential upside associated with improving global economic conditions.
Mr Thornber said that contrary to what some investors might think, global equities have been relatively stable over long periods of time, and that on a yield basis alone, are still holding up well.
“And while many high yield assets are becoming more and more expensive, many equities, relatively speaking, are cheap at the moment. And what makes high yield global equities even more attractive to us is that we are starting to see payout ratios increase in the US, Europe and Asia.”
“Following the GFC, many companies sought to protect and consolidate their balance sheets and as a result there was a significant compression in payout ratios. However, with improved global economic data and stronger corporate profits in many sectors, payout ratios are starting to improve,” he explained.
Mr Thornber concluded by saying that he believes investors will continue to rotate into risk assets in 2013, but only where there are prospects of real returns.
“And that’s where Threadneedle’s Global Equity Income strategies have been able to perform well. We leverage the insights of colleagues from across the investment floor covering various asset classes to gain a better perspective and understanding of the key macroeconomic developments and themes that are likely to play out. We then pick stocks that meet our yield targets and also provide the potential for sustainable growth,” he said.
