"What if, despite reviewing your investment portfolio each year, you're scratching your head over how to invest in an era of austerity?"
Finding value amid austerity – the new normal 30/01/2012
What if, despite reviewing your investment portfolio each year, you're scratching your head over how to invest in an era of austerity?
Globally you would be joined by many others who have Europe, the weak growth in the US, likely unsustainable growth in China and continued global imbalances top of mind.
There are silver linings, though, according to Glyn Owen, Investment Director at Momentum Global Investment Management.
The "new normal" is now the consensus, Owen said.
"We face a multi-year period of deleveraging in the developed world where the current huge levels of debt will get paid down which means higher savings and less spending, and therefore a much more muted recovery than you normally get from a deep recession such as the post-Lehman recession which was truly very deep.
"This recovery in the US is the slowest on record for the past 100 years. [Our] house view is that subdued growth is likely to continue for some time ahead as we go through this deleveraging process."
Supporting this view, he highlights, is an important trend in the performance of government bonds over the past few years.
Yields over this period in US, Japan, Germany and the UK have gone from 5 percent to 2 percent, extraordinarily low by any standard and lower than the levels prevailing when Lehman went bust at the end of 2008.
"That's telling us something very serious about what is going on in the world. There's been this flight to safe haven status and the recognition that we are in a very low growth, potentially deflationary period that could go on for quite a while".
With all that's happened over the course of 2011 both investors' and analysts' expectations for growth have been adjusted downwards.
The Citigroup Economic Surprise Index shows data releases compared with expectations of economists prior to the data release.
In the early part of the year the graph fell rapidly with all the data coming out much worse than what people were predicting.
So, everyone reset their expectations down and the data coming out in November has been somewhat better than the market was predicting.
It's important to look at valuations at a time when we're facing very difficult conditions and strong tailwinds.
For example, corporates are well aware that global economy is going through a tough time and they're prepared for it, hunkering down and not building large capacity in times like this.
Yet yields on these bonds are rising, representing an interesting opportunity.
Another area Owen points out as having interesting values is global equities.
Global equities in developed markets have been flat for a decade now during which time earnings have increased a lot so you've had a huge de-rating in terms of valuation of global equities. "If you remember the tech boom, the US equities market was on 30x price earnings ratio. Today it's at 13x," Owen said.
In Europe, which has been hardest hit since the shakeout in markets since 22 July, valuations are down to remarkably low levels.
The dividend yields in equity markets are in all cases higher than equivalent 10-year government bond yields.
And at a time when it's difficult to get any income generating investments, this looks to be good value.
You can invest in equities today and dividend yields are 3-5 percent. The top 50 stocks in the Euro Zone yield 5 percent.
Clearly they're more volatile than high-quality government bonds but you are getting the long-term growth potential and you are getting in at quite low level valuations.
