It is now a stock picker’s market

One of the many side effects of the 2008/2009 global financial crisis was a ballooning of government debt levels in the developed world, which in turn has put the long-term growth prospects of those countries under significant pressure. But is it is not all doom and gloom, and it remains a stock picker’s market, according to the latest newsletter of Barnard Jacobs Mellet Private Clients.

As debt levels grew, confidence about the ability of various countries in Europe to service their debt started to waver. In particular, those in the spotlight were Portugal, Italy, Greece and Spain (known as PIGS), with their relatively weak economies and low productivity levels.

Financial markets are fragile things, and as confidence fell, bond yield spreads between these and more creditworthy nations such as Germany began to widen.

Doubts about the real state of Greece’s national accounts began to set a vicious circle in motion.

More doubt led to higher cost of credit, which in turn fuelled even greater doubt about their ability to service debt. One can appreciate the dilemma here.

Then the contagion began – risk aversion came to the fore and the cost of credit went up in other areas. Investors fled from banks, which had exposure to this sovereign debt.

In order to stabilise the situation and ensure that the cost of debt did not spiral out of control, it was critical that the European Union came to the party with a rescue package. Having done so, any immediate danger has been averted.

The European growth outlook, however, is mediocre (although a weak euro certainly helps), and these forced austerity measures will prove to be an additional handbrake.

It is not all doom and gloom, however, as interest rates in these areas are set to stay low for an extended period of time to offset as much as possible the effects of these fiscal measures.

While it makes sense to be cautious in any approach to growth assets, one needs to bring it back to valuation.

From this perspective, global equities are pricing in much potential bad news with global forward P/E multiples being relatively undemanding. We therefore remain (in the global context) biased to the buy side on weakness.

Markets have recovered a little since the last newsletter.

Locally, share prices have been edging up and bond yields have been drifting down.

Local implied risk premiums, however, continue to hover around 4.5% against a long-term average of 5% (5% or above is regarded as good value). It remains a stock picker’s market.

Our listed property portfolio has a forward expected yield of some 9.1%, which is regarded as fair value; and our preference share portfolio yields around 7.8% (tax free), which remains attractive.

Inflation is likely to be relatively subdued for some time, and corporate bonds yielding in excess of 10% are seen as being attractive prices.

Mark Appleton