Global equity income investing can provide a relatively high income yield for retirees and other investors, as well as steady capital gains. It gives fund managers the flexibility to pick the best income stocks globally, rather than being limited to a single market.

The key is a truly global approach, an uncompromising search for well-run companies which pay a steady stream of dividends, and eschewing complex derivative-based strategies in favour of simplicity. When these principles are applied effectively, global equity income strategies can play an integral role throughout Australian savers’ lifespans, from the growth phase all the way into retirement.
Australia boasts a strong dividend culture and a history of delivering good growth. However, much of these dividend yields have come from the financials and materials sectors, with little diversification further afield. Australian yields may be reasonable today, but given the narrowness of their sources, it is questionable whether they will continue to deliver in all market environments.

Going global

Why go global? A global approach provides the opportunity to access the world’s most promising high dividend stocks. This means a better diversified portfolio, offering a degree of downside protection if a particular country or sector underperforms. Investors benefit from a larger pool of prospective companies and industries than they would get by looking purely within Australia.
Global equity income funds have come to the fore in the wake of the financial crisis, which highlighted the need to diversify. Since then, other market events, such as the sharp fall in oil prices, have demonstrated the importance of not being overly reliant on one sector.

A badge of investment quality

Having so many stocks to choose from gives access to more well-run companies which pay consistently high dividends.

Dividends are an under-appreciated sign of investment quality. There are several reasons why companies which pay consistent dividends are appealing. Businesses which prioritise paying a steady stream of income to their shareholders are typically effectively managed, with a strong degree of cashflow certainty. They are usually established, profitable companies.

Empirical research by Robert Arnott and Clifford Asness showed that high dividend pay outs indicate a company is confident about the future. They concluded that company management confident of sustainable future earnings growth tend to pay out a large share of earnings in the form of dividends, unlike those that are more pessimistic who pay out a lower share – perhaps so that they can be confident of maintaining the dividend payouts.

Such well-managed companies tend to have a high dividend yield, earnings growth and robust balance sheets. Furthermore, as the table below shows, reinvested dividends compounding over time make a powerful contribution to capital growth. As a result, these companies offer the ideal combination of high income and potential capital growth.

The role of global income

Global income strategies can play a key role in giving investors a retirement income. Australian savers are moving away from taking their superannuation pension savings as lump sums and instead are adopting strategies which allow them to gradually draw income in retirement.

The latest data from the Australian Bureau of Statistics (2015) suggest that barely half (53%) of Australian retirees expect their main source of personal income in retirement to be superannuation, an annuity or allocated income.

Yet like many people all over the world, Australians are concerned about funding their retirement and their future financial security in general. Data from a white paper by IPSOS/MLC Australia, A look at lifestyle, financial security and retirement in Australia (2016), found that a third of Australians believe their children will not be able to afford the same quality of life that they have enjoyed.

Almost three in five Australians were concerned they would be unable to fund their current lifestyle over the next decade, with people aged 50-70 marginally more concerned than other age groups.

As investment products grow more sophisticated to meet the needs of retirees who no longer want to simply take a lump sum at retirement, global equity income strategies can play an integral role in meeting their needs. This style of investment gives investors a good yield, with the potential for growth over time.
Moreover, the role of income investing isn’t limited to the post-retirement universe. In fact, global equity income investing can help to accumulate capital. When dividends from an income fund are reinvested and compounded over time, they can form a large chunk of long-term growth.

It’s time to re-think the role of income in Australian investors’ portfolios. Income is much more than just a bond proxy. Across the globe, it is possible to identify companies which prioritise delivering solid dividends, while pursuing long-term growth. These companies represent an attractive proposition for Australian investors, wherever they are on their savings journey. The effect of compounding reinvested dividends adds to the attractiveness of this style of investing for younger savers.

By Stephen Thornber, Global Equity Portfolio Manager

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Mark Burgess

Global markets are being troubled by a range of issues; some old, some new.

To my mind, three issues are worth paying close attention to:

• Global growth
• Ongoing macroeconomic uncertainties in China
• Debt

Growth and expectations have been reined in during April as the short-lived Chinese stimulus – which briefly led to improved economic data – came to an end and Europe slowed, not least because of Brexit fears in the run-up to the EU referendum on 23 June. Leading indicators across the globe are all showing soft GDP growth and the global growth slowdown is leading to expectations of rates being lower for longer, which in turn is providing support for risk assets.

In Europe, the mediocre economic and company data we are seeing would usually be alarming, but with low levels of productivity this level of economic activity still represents above-trend growth. So we’ve seen equity markets rally off their lows at the first part of the year, not because the news flow is improving but rather on the expectation that interest rates will stay low as a result of the low growth environment. Core bond yields have rallied and that discount rate has provided support to long-duration assets and risk assets more broadly.

But this fragile rally has not made for a robust investing environment. Nevertheless, it is the environment that we have. Clearly, in a low-growth world we are always closer to the fear of recession, which we saw earlier this year. Corporates are navigating through the terrain relatively well, although this is against significantly revised earnings expectations.

Our equity strategy has been to favour the UK, Europe and Asia ex Japan and, while we are well-positioned for a low growth, low return environment, we have recently decided to take some risk off the table by paring back our overweight position with regard Asia ex Japan.

China is an ongoing theme. Clearly, markets became concerned by the absolute levels of Chinese debt and China’s ability to both sustain its growth and engineer a soft landing without prompting a credit crisis. It has taken on more debt to keep growth growing and markets have perversely accepted this – perhaps this is another case of extraordinary fiscal and monetary policy becoming ‘the new normal’. It is difficult to call when China’s credit issue will become more immediate, though recent rhetoric indicates there is an increasing clamour for the People’s Bank of China to address the ‘credit binge’. Not least with the publication of an article in People’s Daily citing an ‘authoritative source’ that was critical of the debt-driven growth strategy employed by the Chinese authorities.

Any departure from a strategy of growth through credit issuance would have significant implications for markets. It would focus the spotlight on the number of bad loans in the Chinese banking system and lead to rising corporate defaults. This could bring to an abrupt end the change of fortunes that has lifted commodity prices. Though I don’t believe we are yet at the point where the People’s Bank of China will turn off the credit taps, we are keeping a close eye on it and I am not hugely confident about China’s ability to get through this without doing too much damage to itself or the global economy.

It is not only China that has a debt issue – net debt to GDP is near or at all-time highs in most countries. This has not been an issue for corporates due to massive monetary stimulus and low interest rates, but the underlying macro backdrop is not one that suggests rampant market returns. There are huge amounts of fiscal debt in the system and generally three ways to tackle it. Growth is one way, though as we’ve seen this is proving difficult across the globe, while you can inflate your way out of debt or you can default. Monetary policy has so far failed to result in inflation working its way into the system, while defaults will do little to buoy markets. Countries may well try to use all three mechanisms available to them, so we might expect defaults to rise.

We have recently discussed whether any country might seek to write off its debt and what impact that would have. While this is largely a thought exercise, it is interesting to imagine what the market reaction would be to, say, Japan writing off its debt, which it largely owns itself. With no-one to pay back, a write off might not have a hugely negative impact, but it could lead to currency implications and a knock-on effect on the markets.

In the US, inflation data is ticking upward, with wages rising in most areas, yet markets had been relatively sanguine until the publication of Fed minutes indicating a June interest rate rise could be on the cards gave markets the jitters. Even so, the prevailing market sentiment is that the magnitude won’t be high enough to prompt a strong market or central bank reaction, which could be right given the number of deflationary shocks we have experienced.

The US economy needs to create around 80,000 jobs a month to maintain the employment rate. Job growth has been running faster than that level for over five years, and it appears that job openings are becoming harder to fill. While wage growth has increased from the 1.5-2.0% range in which it sat for many years, its recent rise to a 2.5% growth rate still appears tentative. Against that backdrop, the dollar may have started a much anticipated bull run, with the well-known consequences for emerging markets and other asset classes.

By Mark Burgess, Chief Investment Officer EMEA and Global Head of Equities

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Important Information: This material in this publication is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments to anyone in any jurisdiction in which such offer is not authorised, or to provide investment advice or services. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. The research and analysis included in this publication have been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. This document includes forward looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guarantee, or other assurance that any of these forward looking statements will prove to be accurate. This document may not be reproduced in any form or passed on to any third party without the express written permission of Columbia Threadneedle Investments. This document is not investment, legal, tax, or accounting advice. Investors should consult with their own professional advisors for advice on any investment, legal, tax, or accounting issues relating an investment with Columbia Threadneedle Investments.

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Benedikt, Nicolas and Amit are senior research analysts; each with more than 10 years of experience in asset management. They join Stéphane Jeannin and Brad Colton as Analysts on the team, significantly enhancing the depth and experience of Threadneedle’s US equities capability.

With the addition of the new Analysts the US Equities team now has full coverage across all sectors. Benedikt and Nicolas join from Columbia Management, which along with Threadneedle, comprise the global asset management business of Ameriprise Financial. Nicolas Janvier will maintain his analytical duties and responsibilities with Columbia Management’s New York-based value team. Amit Kumar joins from Artham Capital Partners.

In addition, Richard Adams, who was previously an analytics manager in the Reporting and Information Services team at Threadneedle, joins the US Equities team as Client Portfolio Manager. The appointments follow that of US Fund Manager Nadia Grant earlier this year, joining existing fund managers Neil Robson and Ashish Kochar, and bringing Threadneedle’s US Equities team to a total of ten.

Mark Burgess, Chief Investment Officer at Threadneedle said: “I am very pleased about the swift progress we have made in enhancing our London-based US Equities team, while at the same time increasing our collaboration with Columbia Management’s US Equities team. This brings our clients the benefit of a fully resourced team that leverages the significant capabilities, intellectual capital and strength of both organisations. I am confident that with their significant expertise in this asset class, our US Equities team will continue to deliver for our clients globally.”

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¹ as at end of March 2014

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Mark Burgess

Global equities and global bonds made progress in May 2014, with the former outpacing the latter in local currency terms; for the month, the MSCI World index rose 2.34% in total return terms while the JP Morgan Global Government Bond index returned 0.87%.

Commodities, which prior to May had performed very robustly, lost some ground as the Dow Jones-UBS Commodity index produced a dollar total return of -2.87%. Nonetheless, returns from the asset class remain well into positive territory for 2014 to date.

Looking forward, we believe that there are three questions that investors have to consider over the remainder of 2014:

•    How will bonds react to the normalisation of policy in the US?
•    What will happen in emerging markets as policy is normalised?
•    Will corporate profits drive equity markets higher?

Bond markets in recent months have presented us with a conundrum – indeed we held an ad-hoc Perspectives meeting in mid-May to discuss the meaningful decline in core government yields. In the US, our expectation is that GDP growth will be in the order of 2.5% this year and that the overall macroeconomic picture is probably stronger than the Q1 GDP data would suggest. All else equal, that should push bond yields higher, particularly if the Fed stops its QE programme later this year.

The outlook for eurozone bond markets is rather more difficult to call; certainly Germany and Spain appear to have positive growth momentum, which should put some upward pressure on yields if that momentum remains in train. By contrast, the growth outlook in countries such as Italy and France remains very subdued, which is likely to keep yields low. The lack of growth in France and Italy is worrying given that debt levels remain elevated at a time when inflation in the eurozone overall is very low (just 0.5% for the year ending May 2014). The ECB has responded by cutting official interest rates to record lows and now charges banks for depositing funds. It has also outlined a new programme of Long Term Refinancing Operations (LTROs) to aid bank lending and has said that it will intensify preparatory work related to outright purchases of asset-backed securities. Whether this policy response will work remains to be seen, but it shows that the ECB is definitely not resigned to a protracted period of low inflation.

In emerging markets, we remain positive on local currency emerging market debt (EMD) in our asset allocation matrix; my colleagues James Waters and Toby Nangle have commented recently on the value offered by EMD, especially for investors seeking absolute levels of yield. However, we maintain a bias against emerging market equities as we are still concerned about the macroeconomic outlook for China (which is a large constituent of the EM equity indices but only a relatively small component of EMD indices). As I have mentioned in previous comments, it is very hard to find examples of credit expansion on the scale seen in China which have not caused policymakers some significant headaches once the bonanza has ended.

Our outlook for equity markets for the remainder of the year is positive; M&A has made a welcome return in recent months, and while this increases the risk of value destruction by company managements in the longer term (e.g. if they overpay or acquire businesses that later prove to be a poor fit), it does provide an important short-term support for stocks, particularly at a time when the Fed is tapering QE. The style rotation over the last few months has been significant, but overall equity markets have been strong and current index levels suggest that investors still have confidence in the outlook for profits. For that reason, we trimmed exposure not only to government debt but also to investment grade credit in late May, as the rally in core yields had left both asset classes looking expensive. We deployed the proceeds into Japanese equities, as the fundamentals here continue to improve while the market has lagged other developed regions over 2014 to date.

by Mark Burgess, Chief Investment Officer at Threadneedle Investments

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Russia’s incursions into the Ukraine have been condemned around the world, have caused a steep sell-off of the Russian rouble and equities and have hurt financial markets in other central and Eastern European markets. However, any measures taken to isolate Russia from the global community will affect European countries more than the US given the former region’s closer economic ties with Russia, and especially given that Europe is only just emerging from recession. Russia has at least taken a step back from the brink by pulling some of its troops back to base and saying that it will only use the military as a last resort. Markets reacted positively but this story has definitely not gone away.

Ukraine’s economic problems remain a concern

While markets believe that the turmoil in Ukraine is unlikely to have broad-based implications for emerging markets (EM), any default in the EM world would prompt negative headlines. Certainly, the confrontation between Ukraine and Russia has distracted investors from a potential EU/IMF rescue deal for Ukraine, where there is a pressing need to address the US$13bn of debts (including obligations from the state-owned gas company Naftogaz), which are due to be repaid this year. Asian markets are not ignoring the possibility that the situation in the Ukraine will deteriorate.

 

Crowded calendar of political events ahead in 2014

Other notable newsflow came from Thailand where more negative headlines were generated by the rice purchasing scheme scandal. The continuing investigation by the anti-corruption body could lead to the Prime Minister being removed from office, while domestic violence continues to affect Bangkok. In addition, the 2014 presidential election in Indonesia has come to life with the incumbent Democratic Party conducting its presidential-nominating convention to boost the popularity of potential candidates such as Dahlan Iskan, the minister of state-owned enterprises. The reformist and current Jakarta governor Joko Widodo of the PDIP is likely to be the front runner if he is put forward as the party’s official contestant. Finally, politics has returned to the centre stage in India where 11 small political parties have joined forces (the up-and-coming, newly-formed AAP, however, is absent) to form a third-front to wrest power from the popular-opposition BJP and the underdog-governing Congress party.

Asia to see a correction?

Lately, the market has faced many “on-the-brink-of” situations. Ukraine appeared on the brink of civil war and Russia’s aggressive intervention in Crimea, and the uncertainty surrounding the Ukraine’s economic and financial position means it is still close to disaster. Meanwhile, the opaqueness of Chinese government policies towards interest rates and currencies means investors are close to resetting their consensus views (especially in terms of the currency) and perhaps resizing their investment allocations to China. Given the challenges facing Europe, China and the US, Asian fixed income markets are likely to experience some form of correction following the robust performance seen in February. We will monitor developments closely and use our active approach to exploit any opportunities created by further volatility.

Commentary by Clifford Lau, Head of Fixed Income, Asia Pacific

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Craig Mowll

Equity income strategies may have performed well in the last few years, but as quantitative easing is wound back and growth accelerates, can yield stocks really continue to deliver?

Absolutely, says Stephen Thornber, Fund Manager, Global Equity Income at Threadneedle Investments, who explained why investing for income can add performance over time, regardless of wider macroeconomic or stock market conditions.

“We believe there are fundamental reasons why high dividend companies outperform over the long term. Dividends demonstrate a commitment to creating shareholder value, promote long-term decision making, and reduce the risk that management makes poor investments.”

“Successful income investing is about identifying businesses that are paying high and growing dividends while sustaining a robust financial position. In a rising interest rate environment the importance of focusing on dynamic growing companies cannot be understated,” Mr Thornber explained.

“There is a misconception that performance of dividend stocks is closely linked to interest rates. In fact the majority of dividend stocks are priced by the market on a ‘total expected return’ basis against other stocks with similar prospects.”

“The exception to this is stocks we call ‘bond proxies’, typically companies that offer little or no growth, but a reliable income stream”. Regulated utilities or REIT’s would be good examples. These stocks are interest rate sensitive, and challenged by rising rates.”

Given the strong performance of the past few years, there is concern that equities may now be overvalued, and that investors should exercise caution.

Mr Thornber said that in his view equities remain attractive given valuations are at or below long term averages, and earnings are set to accelerate as a global recovery takes hold.

“High-dividend paying companies are trading at a discount to the broader market in every major market” he explained. “We are taking particular care when selecting companies in the US, where valuations are higher, but having said that, we feel the strong prospects for the US economy support higher valuations,” he said.

Mr Thornber continued by saying that dividend investing remains a sound investment approach for a number of reasons.

“For a start, current dividend payout levels are set to rise because corporates are in good health. In stark contrast to governments, corporates have done a good job of repairing their balance sheets in recent years. Cash generation is good, and because there is still reluctance to commit to large-scale capital expenditure, companies are using their cash in shareholder-friendly ways, such as dividend increases, special dividends and share buybacks,” he said.

In conclusion, Mr Thornber said that a global approach to equity income investing provided investors with a wider opportunity set.

“By adopting a global approach, investors gain access to economies which may be growing more quickly than their domestic economy.

“When managing portfolios, we aim to tilt the portfolio towards the fastest-growing industries and economies, spreading risk and increase total returns for our investors,” he said.

Threadneedle’s partner in Australia, Certitude Global Investments, reaffirmed that an equity income strategy is a particularly apt solution for local investors looking for international diversification.

CEO of Certitude, Craig Mowll said: “Australia represents only a small fraction of all investment opportunities, and local investors have recognised the need to diversify offshore. However, volatility in global markets is a concern for many Australian investors who want to preserve capital ahead of their retirement years. An equity income solution is therefore well-suited for investors who are looking to capture growth opportunities beyond our shores but still benefit from income that these dividend paying stocks provide.”

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Bond markets are full of surprises. Core government bonds have been one of the strongest performing asset classes in 2014, propelled in part by worrying signs of emerging market stress.

Emerging market (EM) debt has suffered relentlessly for nearly a year, scant reward for those emerging economies that spent most of the last decade bolstering their finances. Meanwhile, in the eurozone, Greece, Portugal, Spain, Italy and Ireland are among the world’s most indebted countries, and yet their bond markets have witnessed one of the most explosive rallies in history. Is this fair, and what explains this dichotomy?

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Mark Burgess

Commenting on the effect on global markets from the Ukraine crisis,Threadneedle Investments’ Chief Investment Officer Mark Burgess, said: “To date, the fallout from the Ukrainian crisis has been largely confined to the emerging market debt, emerging market equity and commodity markets.

At current levels, emerging market local currency debt appears to offer value, although we expect both the hard and local currency markets to remain volatile in the short term.

Emerging equities reflect concerns not only around Russia and Ukraine but also the weaker growth outlook in Brazil and China. In commodities, Russia is a significant oil player, supplying 30% of Europe’s gas, with 50% of that piped through Ukraine. Any move to curb Russian oil exports by the EU could easily drive Brent crude oil into the $140-160 a barrel range. We therefore do not expect major sanctions against the country.

“Elsewhere, investment grade and high yield markets have been unmoved by the crisis in Ukraine. Foreign exchange markets, outside of the obvious areas such as the rouble, have also ignored it. Developed market equity and bond markets have recently been driven by other factors such as the headwinds from a stronger pound for UK equities, the severe weather in the US and the weaker than expected European corporate results.

Finally, core government bond investors have been focused on the softer US macroeconomic data, which has seen 10-year Treasury yields fall. We are monitoring the situation closely, but as it looks today, markets are not expecting further intervention or action by Russia.”

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Mark Burgess

Threadneedle Investments has raised its 2014 GDP forecast for developed economies as a result of the strengthening global economic recovery.

The company’s US forecast has increased from 2.5% to 2.7% and its UK forecast from 2.25% to 2.5%. The euro area has seen the biggest jump from 0.7% to 1.1%.

Mark Burgess, CIO at Threadneedle Investments, said: “The global economic recovery is gathering pace. It is driven by the developed world and as a result we have raised our economic growth forecasts for the three major economies. The US is increasingly becoming an attractive base for manufacturing, while housing and consumption remain strong. The UK housing market has also strengthened, with notable improvements outside the buoyant London. The unemployment rate has fallen materially and consumption shows increased confidence. In addition, we have increased our euro area forecast, reflecting healthy growth in Germany and a better than previously expected recovery in Spain and Ireland.

“However, the better the developed economies seem to be doing, the more the discrepancy with the emerging markets becomes apparent. Volatility is likely to persist in the short term as emerging markets find increasing challenges to growth.

“Tapering of quantitative easing is leading to capital outflows from the region, putting a strain on currencies, especially in those economies with weak balance of payments. Consequently, we are seeing a number of interest rate rises to defend currencies which, in turn, will hit economic activity. China’s economy is proving slow to reposition away from investment towards consumption. An extended banking sector and fears of cracks in the shadow banking system are additional worries.

“It is important to note, however, that we do not expect these issues to become another contagious crisis. More emerging countries have floating currencies and higher currency reserves than in previous periods of crisis. The rapid currency devaluations and interest rate rises are already leading to the necessary adjustment of cutting consumption. China does not have a freely floating currency but it is not reliant on foreign capital and has some policy flexibility to help in managing its problems.

“We therefore see the current emerging market weakness as a correction, after a strong rally, which could offer an opportunity to add to equity positions. We prefer exporters over domestic consumption stocks. Outside this, our portfolio themes are little changed, searching for strong, growing companies, payers of good and increasing dividends, M&A beneficiaries and companies well-positioned for the global economic recovery.”

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Mark Burgess

“As we enter the new year, markets are more or less where we left off in December. Investor appetite for risk is up, liquidity is free flowing and credit markets are open for business, certainly from a new issues perspective.

As investors and commentators consider the year ahead it strikes me there are three issues we need to consider: the growth outlook, what a normalised yield curve means for emerging markets, and whether economic growth can drive corporate profit growth.

Is growth going to become embedded in the developed world?

In both the US and UK, economic growth is gaining momentum. In the US, the impact of last year’s fiscal drag is behind us, growth is building and job creation appears robust. The financial system is working with a strongly capitalised banking system lending to the real economy. One could argue that with QE still very evident we should expect no less (stimulus is running at $75bn per month). Nonetheless the US economy looks well placed for 2014 and beyond. UK growth is also taking hold; again private sector job creation is strong, leading indicators are all signalling significant expansion, and the housing market in the south east is particularly buoyant. On the current trajectory we can legitimately consider the need for an interest rate rise this year, something not currently discounted by markets. In Europe, again leading indicators are turning positive (with the exception of France). Even Spain appears to be finally emerging from years of austerity. Certainly peripheral bond markets have been on fire, with yields falling sharply as tail risks diminish. With a more robust global growth environment, policy measures will continue to normalise and long, and in turn short, rates will rise. Implications of this include rising borrowing costs for over-indebted governments and consumers, and a challenging headwind for fixed income investors. It’s also a scenario that lends itself to a stronger $US.

Will tapering, rising bond yields and a stronger US dollar challenge the emerging markets in the way that it did last summer? 

Last year’s car crash in EM debt and equities could be a pre-cursor to a full-blown motorway pile up later this year. Deficit countries more dependent on external financing have remained under pressure since then. Both the equity and debt markets were standout underperformers last year, although equities had a bounce in the second half. The regions’ woes have not been helped by the new Chinese government appearing to want to contain the explosive credit formation facilitated by the shadow banking sector. This has further undermined investor confidence, as has the prospect of a stronger dollar. Nonetheless, if the region can withstand tighter (or at least less loose) US monetary policy, then real value will begin to appear. Bond yields are significantly higher, equity PE ratios are much lower than the developed world and at some stage the region will become attractive. For now though we need to see evidence of stability before considering increasing our exposure.

The final question surrounds the prospects for corporate profits.

Equity markets have clearly performed extraordinarily well over the last few years; the S&P 500 is up by 50%, the Financial Times Actuaries All Share Index up by 33% and the world equity index up by over 40%. Corporate profits have grown, but not nearly as much as markets have risen. So returns have been driven by a re-rating, fuelled by increasing confidence, ongoing central bank stimulus and liquidity provision. For equity markets to progress further we need corporate profit growth to take up the running – it’s unlikely equities can go much further without that happening. Returning then to our first question, if global growth takes hold there is every reason to believe the backdrop for corporate profit growth will be provided, although we will need to be mindful of the impact of falling unemployment on margins given current elevated levels.

There is one final issue to consider. We are nearly six years away from the global financial crisis (although it feels much closer in investors’ memories). Looking at past cycles, history would suggest we are now closer to the next crisis than the last one. Let’s hope that proves not to be the case!”

Comment from Mark Burgess, Threadneedle Investments

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