I wrote earlier this week about the possibility that we might be at the beginning of a bubble in simplicity in the kind of high-quality, dividend-paying stocks that everyone now appears to agree are the best things to invest in for the long term. The story is continued by Jane Fuller in the FT.
Investing for income, she says, has "not been so fashionable since the first half of the last century", when the yield on equities was generally higher than that on government bonds (as it is now). These days, baskets of higher-yielding stocks are regular outpeformers and it is slowly becoming clear that the 1980s and 1990s were very unusual in the way that they provided most of their total return from capital gain rather than income.
The question, of course, is what happens next? Equity investors aren't generally supposed to worry much about GDP growth: as Tim Bennett points out, "GDP growth and stockmarket returns do not have any particularly obvious relationship either empirically or in theory". But we do need to worry about earnings growth. That's where the problem might come in. Right now, says Fuller, the typical stock in a blue-chip high-yield portfolio will be either a huge international firm or a national champion of some kind.
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Both are vulnerable in profits terms the first to macroeconomic forces such as the slowdown in China (I'm tweeting a lot on this @merrynsw this week) and the second to domestic slowdown (of the kind you're seeing everywhere). At the same time they will be too diversified to be able to expect particularly high revenue growth, even at the best of times. They also will already have record-high profit margins and record low interest rates to work with. The upshot? Investing in quality is good and it's "good to see a revival in the art of stock picking on a value basis". But "this is as good as it gets for large income stocks".
Ed Yardeni of US-based Yardeni Research is worried too. His latest note points out that, if you look at anything from consensus expected earnings per share in the US, to after-tax net income for S&P 500 firms and the profits coming into the States from abroad, "the earnings-led bull market in stocks is running out of earning power".
We don't think it's time to move out of quality dividend-payers (perhaps it never will be). But we do think it's worth noting that, given the environment, the profit margins of a good many firms are probably at risk one way or another. And the firm most at risk? Yes, it's Apple. We don't know exactly what margins it makes on what products, says Matthew Lynn. But "most analysts reckon that margins across its range are in the region of 50%". They're unlikely to stay that high. To see why and to find out why you should sell now, see Hidden dangers in the Apple hype machine.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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