A glimmer of hope? UK equity yields trigger key 'buy' indicator
The yield on UK equities in the FTSE All Share index has shot above the return on gilts for the first time since 2003, an indicator normally seen as offering a good excuse to buy stocks.
According to fund manager Fidelity, the UK's All Share yield has risen to 5%, against 4.44% on 10-year gilts. A Fidelity spokesman said the development was interesting, although he stressed that his firm did not want to draw a firm conclusion, given the possibility of dividend cuts, particularly in the banking sector.
The dash for safety has triggered a fall in bond yields across the world. The three month US Treasury bill yield, equivalent to 0.02%, is at the lowest level seen since 1941. Alarm grew yesterday when news emerged that a money market fund run by Reserve Management Corporation had "broken the buck" by seeing its net asset value drop below the $1.00 mark.
The UK equity yield crossover coincides with a growing feeling among managers that share prices have suffered too much pain. When equity yields moved above those offered by bonds in 2003, sentiment improved dramatically when a number of managers led by the late Alastair Ross Goobey of Hermes argued that the time had come to buy.
Fidelity equity Sam Morse said: "Investors may be reassured to know that growth in dividend payments is far more reliable than rises in share prices. Even through the turmoil of the past decade, total returns from UK shares have held up well, provided that you reinvested your dividends."
In a speech to a dinner hosted by consultant Old Broad Street Research last night, Fidelity's veteran stock picker Anthony Bolton said the bear market has entered its last phase. This follows the retreat in commodities prices, although Bolton said this may have further to run, along with funding problems for a series of hedge funds.
Artemis equity manager Adrian Frost, who co-manages income funds, yielding 4.8%, agreed that the time was right to make selective purchases: "Companies whose dividend policy is in the hands of boards of directors, as opposed to their banks, are in a position to offer secure returns to investors." He said that a variety of stocks, currently yielding up to 6%, offer good value, although he declined to forecast precisely when equity markets will turn.
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