Today I’m looking at why investors should be investing in equities in 2016 and beyond.
Dividend yields are high
There are some huge dividend yields out there for income investors to get their hands on. The current FTSE 100 yield is close to 4% and many companies yield over 6%. Income portfolios are incredibly popular at the moment and I believe that income stocks should be in everyone’s portfolio. The beauty of a good dividend yield is compound returns. If you re-invest the dividends then you stand to make a very nice return over time in high-yielding stocks.
Many sectors offer value and growth potential
There are many sectors that are wholly undervalued compared to others. Momentum plays like construction and housebuilders look like they will continue strong earnings growth well into the future. Britain faces a housing shortage that many commentators can’t see being met any time soon. This means that the housebuilder stocks that are currently in a bull trend should continue to rise. The commodities sector also offers remarkable entry points and value for contrarian investors. These companies have seen share prices drop by over 50% due to the negative outlook on commodity prices and some now trade below cash value. Low commodity prices have forced companies to conserve cash and reduce capital expenditure. This in turn leads to supply shortages in a few years, which sends commodity prices up again. Brave investors are now accumulating positions in healthy mining and oil companies and waiting for the inevitable upturn.
Interest rates are low
Holding savings and large sums of cash in the bank is generating next to no return. Blue-chip companies paying good dividends should generate a nice return over the next few years. Defensive plays such as tobacco companies will continue to outperform as investors want lower risk ways of growing their capital. This week may see the first interest rate rise in America but it’s likely to be very minor and one of many rises we’ll see in the next couple of years. A meaningful interest rate rise in the UK also looks unlikely too, which means that defensive plays will continue to be in demand in 2016.
Emerging markets have serious growth potential
After a few years of troubled growth there seems to be some potential coming through. Indian growth rates took many by surprise and added fuel that we may be on the edge of another bull run in emerging markets. Low commodity prices also fuel growth, which is another reason why I believe emerging markets may be about to turn. In the past when the Fed raised rates, the US dollar has stopped appreciating. In response to this fund managers flow money into emerging markets. This could create a real demand for equities and tracker products in emerging markets.
Any investor must plan for the year ahead and research what might drive the market next year.