Editor's letter

How negative yields could destroy the stockmarket

If the domination of negative yields continues, companies will give up on the equity markets. Why, when you are paid to borrow, would you look to the stockmarket instead?

Marks & Spencer © Marks & Spencer

It's been a bad week for Marks & Spencer. With its share price half of what it was five years ago, one of our most iconic retailers has been fairly unceremoniously chucked out of the FTSE 100 index. This is hardly a surprise. Younger generations haven't taken to its clothing lines. The food business is hideously competitive. And M&S is dealing with almost non-stop disruption in the retail environment in the UK. However, given that it was the fifth-largest firm in the index when it launched in the 1980s, the expulsion is still no small humiliation.

On the plus side, it is worth noting that M&S still makes a profit and that it pays a yield of 7% (with the dividend nearly twice covered by profits). That makes it the kind of firm you might not get much of a chance to invest in in the future. Think about the way that negative yields are transforming finance. If the domination of negative yields continues, says Seema Shah in the Financial Times this week, companies will "surely focus more on bond markets than equity markets". Why, when you are paid to borrow, would you look to the public markets instead?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Expect then (assuming negative yields stay with us) a long-term environment in which bad companies are propped up by stupidly cheap debt and in which the usual pipeline of investable public companies slowly dries up. And instead, the only companies you will see coming to market are those that no one in their right mind would ever lend money to.

One example of that (much discussed by John and I on our weekly podcast) is WeCompany, parent of office-sharing company WeWork. It should be a simple business (buy office, rent bits out to other people, sometimes with beer), but you wouldn't know it from the 383-page prospectus. The firm is definitely growing. But it is also spending nearly $2 for every $1 it gets in revenue and as Rett Wallace of US research firm Triton points out, it offers no "narrative theory of future profitability". It does tell us that WeWork is a "community company committed to maximum global impact" and that it has a mission to "elevate the world's consciousness". But on when you might see a real profit the kind that may lead to dividends? Nothing. Don't buy WeWork when it has its initial public offering. Maybe buy a company you know can make money perhaps even UK retailer Ted Baker?

Advertisement
Advertisement - Article continues below

Otherwise, if you want to cheer yourself up this week, do not read this week's politics pages (you will have to read about lousy politicians and their annoying attempts to delay Brexit forever), or personal finance (car-hire stories that will upset you). Do read City View, where Matthew Lynn explains the upside to populism and our cover story, which looks at the fascinating future of cloud computing and considers how Microsoft has transformed itself to become a leader in the field. You might feel that Brexit is as important as anything gets this week. We feel that too. But the truth is that the end of the internet as we know it, and the advent of the cloud, is likely to change our day-to-day lives an awful lot more.

PS. If you haven't already booked your seat at the MoneyWeek Wealth Summit on 22 November, visit moneyweekwealthsummit.co.uk and use the code "MWEEK20" to get 20% off. But act now tickets are limited.

Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511283/investors-are-going-bonkers-for-bonds
Bonds

Investors are going bonkers for bonds

In a further sign of the mania gripping the bond market, Germany issued €3.15bn of zero-interest ten-year bonds last week.
18 Jul 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular

Visit/investments/stocks-and-shares/600863/sirius-minerals-anglo-american-takeover
Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020
Visit/investments/commodities/gold/600874/gold-is-at-its-highest-level-in-years-heres-how-to-invest
Gold

Gold is at its highest level in years – here’s how to invest

Gold's rise at a time when the dollar is unnervingly strong isn't unheard of – but it is curious. John Stepek explains what's going on, and what it me…
21 Feb 2020
Visit/investments/stocks-and-shares/share-tips/600843/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
21 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020