With growth hard to come by, more than ever it's all about the dividend yield.
Is someone out there reading my ramblings? Only yesterday, after seven straight days in a row of stock market gains, I highlighted how sovereign debt concerns, particularly in Greece, have not gone away.
The jitters are back, for the moment anyway. Apparently they came from a Wall Street Journal story that claims some banks involved in the summer's European stress tests had understated their exposure to sovereign debt.
Banking shares fell, with Barclays (LSE: BARC) leading the way, down 9p to 314p. Is it really fifteen months since I sold my entire holding at about the share price they trade at today? Does that make me an investing genius, plain lucky, or someone who is great at looking through the rear view mirror? Add your comments below.
The canary in the coal mine?
As for the sticky issue of sovereign debt, according to Bloomberg, the gaps between 10-year German bond yields and those of Irish and Portuguese debt climbed to all-time highs, while the German-Greek yield spread increased to its widest level since May.
Also on Bloomberg, Quincy Krosby of Prudential Financial said "Widening spreads are like a canary in a coal mine. It's a signal that debt concerns are mounting."
Look out below? The VIX, otherwise known as the fear index, jumped close to 12% in New York. Are you nervous?
It's not supposed to be like this. "Rally fades with summer's demise" goes the headline on FT.com. Whatever happened to the "Sell In May And Go Away" mantra? Summer is supposed to the time when markets pause for breath, before unleashing a last quarter assault on new highs as investment bankers chase their million pound bonuses. FTSE 6,000 anyone? Maybe next year.
Pessimism rules, again
What a difference a day makes. Just yesterday, markets were happily ignoring Greece, and the double-dip recession, focusing instead on the still-dire but better than expected US job numbers. Today, obviously after reading the Motley Fool, it has decided to be all pessimistic again. Next week may be different. Or not.
If nothing else, it just goes to prove how fickle markets can be. If you base your investing decisions on the daily mood changes of the market, you'll always buy at the top and sell at the bottom.
In that respect, if you are cashed up and looking to buy shares, you should cheer for a lower stock market, in the short term at least. The only slight stick in the ointment is that sort of bad news that brings much lower share prices is, err, a Sovereign Debt Crisis Mark II or a slide back into recession.
Are they on the way? One might lead to another, so we could be hit with a double-whammy. If I were a betting man, I'd suggest the odds of a major double-dip recession are about 10%. I'm certainly not making any investment decisions on the basis of a 10% chance.
The long and winding road
Much more gloomy talk from me and you'll all think I've turned all bearish. I haven't. I remain a realistic optimist. And despite all these stock market machinations, I remain of the view the economic road to recovery will be long and winding, with apologies to the Beatles fans out there.
With that in mind, yesterday I also said today I'll look at the prospects for some blue chip shares. Regular readers will be sick and tired of me banging on about the merits of such companies, but, hear me out…
| Company | Share
price | F'cast
P/E | F'cast
dividend
yield | F'cast
earnings
growth |
|---|
| GlaxoSmithKline (LSE: GSK) | 1,249p | 10.2 | 5.3% | 4.5% |
| BAE Systems (LSE: BA) | 323p | 7.4 | 5.7% | 4.4% |
| Vodafone (LSE: VOD) | 160p | 10.9 | 5.6% | (3.3%) |
| Standard Life (LSE: SL) | 215p | 12.6 | 6.2% | (7.1%) |
A quick glance through the middle two columns and everything looks rosy. These are solid FTSE 100 companies trading at modest valuations and attractive dividend yields.
But then look at the last column: growth. As you would expect in this sluggish economic environment, these large companies are struggling to grow. As such, despite their relatively lowly P/E ratios, their share prices are unlikely to suddenly take off.
Enjoy the divis
This might be stating the obvious, but an investment in such blue chips is mostly about the dividends. Sure, the shares might get a re-rating to a P/E of 12 or 14, but I wouldn't hold your breath. For that to happen, I'd suggest the global economy would have to have put the worst behind it, with unemployment falling and interest rates rising. As I write, there's little sign of that happening any time soon.
But all is far from lost. Big FTSE 100 companies such as those listed above should firstly be able to maintain and grow their dividends, and secondly their share prices should have limited downside from their modest valuations. Investing nirvana? Not quite. Sensible investing in low growth, low interest rate environment? I'd like to think so.
If you are looking for investing nirvana, you need to find growth. The problem is, growth comes at a price. Have you seen the P/E ratios on ARM Holdings (LSE: ARM) or Autonomy (LSE: AU)? You can certainly put the odds in your favour, but there are no free lunches in investing.
More on the economy and the markets:
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> Bruce Jackson has an interest in Vodafone and GlaxoSmithKline.
