September 9, 2016 / 2:40 PM / 2 years ago

INVESTMENT FOCUS-The world according to Tina and Gary

* Global bond yields vs dividends:

* TINA at work as bond yields stuck near lows

* Equity investors scouring for sweet spot of growth, yield

* EM assets draw billions, seen vulnerable to higher rates

By Vikram Subhedar and Jamie McGeever

LONDON, Sept 9 (Reuters) - A stagnant world economy littered with political risks has done little to stop stock markets hitting new highs. For that, you can thank Tina.

“There Is No Alternative” has become a common refrain around financial markets as yield-starved investors continue to push stock prices to new highs as they scrape off historically superior returns compared with near zero or even negative bond yields across much of Europe and Japan.

To the most persistently bearish investment advisers, such as Societe Generale’s Albert Edwards, Tina is deluded, represents some of the worst aspects of herd behaviour and will inevitably end in tears. Equities may seem relatively cheap but he argues, and has argued for years, that they can get a lot cheaper.

On the other hand, global investment trends are ossifying around a long-term multi-year horizon of slow growth and low inflation but not outright recession. In other words, supereasy central bank money policy will persist for many years, even decades, and while it may succeed in preventing a shocking economic contraction, it will fail in spurring growth to pre-credit crisis norms that reflate consumer price growth and wages, lift living standards and reduce debts.

The uber bears may be right eventually, but many money managers believe in Tina for now because this sort of world can endure for a very long time.

Equity investors faced with historically expensive valuations, especially on the high-yielding sectors of the market, are getting a helping hand from Gary. “Growth at a reasonable yield” is a strategy that aims to capture some potential for earnings improvement in a slow growth world but essentially providing some investment income.

One example of Gary that investors have latched onto is Big Oil. Shares of major oil producers such as Royal Dutch Shell and BP are back in favour as recovering oil prices boost earnings while slashed capital spending budgets freed up cash to pay dividends.

It has also manifested itself in funds reaching out into less-than-obvious stocks as well as emerging markets and underscores the conundrum facing investors.

To many, the relentless climb of both stocks and bonds in recent years thanks to super-charged central bank stimulus and historically low interest rates around the world has distorted world markets and conventional investment theory.

Investors aren’t buying government bonds for yield, because there is none in most cases. Stocks now offer higher yields than bonds, and investors continue to hoover up fixed income assets for their capital appreciation.

“Equity valuations are stretched and you don’t want to be in an overstretched asset class even though realized and implied volatility has been very low lately,” said Geraldine Sundstrom, managing director and asset allocation portfolio manager at Pimco.

“We are cautious on bonds, and are mildly underweight. And on the equity side, we’re at an inflection point. The earnings recession is coming to an end, but a big rally is unlikely given where multiples are,” said Sundstrom.

The quandary over what to buy is highlighted by the relationship between bond yields and dividend yields which has turned on its head and the gap is now at its widest in at least three decades, according to Thomson Reuters data.

In the United Kingdom, that gap is the widest since the 1940’s, according to investment firm M&G, with more aggressive easing from the Bank of England to stave off a recession following the Brexit vote pushed yields even lower.


Major stock indexes around the world have snapped back from the lows hit after the EU referendum in Britain, and in the United States touched an all-time high.

While trading volumes have eased over the generally quiet northern hemisphere summer, stocks have largely held those gains, but small moves on the indexes mask significant shifts underway beneath the surface.

“Serene progress by global equities hides some frenetic rotation within indices,” wrote Citi strategists in a note to clients, referring to the shift in buying away from so-called defensive sectors such as healthcare to those more geared towards economic growth such as banks, technology and materials.

Citi likened the current shift to three similar moves seen since 2011, all of which failed and warned investors against chasing the rally as corporate earnings and the outlook for growth remain sluggish, and recommend investors pick up healthcare and telecoms stocks following recent underperformance.

“Less sustainable rebounds fizzle out when earnings momentum doesn’t follow through,” said Citi.

This would be a risk particularly for European banking stocks which have rallied more than 30 percent from their recent lows even though the outlook for profits in a low-growth, low rate world remains murky.

In another sign of rapidly shifting investor preferences, emerging markets, shunned last year, have roared back as investors have piled in and both bonds and equity markets are outperforming global peers.

But inflows to emerging markets have proven short-lived for the past three years and a U.S. interest rate hike could leave those markets vulnerable to a swift pullback as higher U.S. rates and bond yields tend to reduce the relative attractiveness of emerging market assets.

The latest Reuters asset allocation poll of investors saw some warn of complacency in financial markets.

“Beyond confusion, this could just be further signs of tension in the market with some investors hanging on to the low growth, low rate paradigm we have been in while others believe change is coming,” said Nick Savone, a managing director in Morgan Stanley’s equity sales division in New York.

Reporting by Vikram Subhedar and Jamie McGeever, Editing by Mike Dolan and Toby Chopra

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