Just another quiet summer week, really. The FTSE 100 started at 5,247 and ended at 5,320. It was hardly worth coming out of the sea to check your BlackBerry.
2:40PM BST 13 Aug 2011
CommentIf only. The modest net gain for stock market investors disguised the most dramatic few days in the markets since 2008. If someone had offered no change as Wall Street was tumbling 6.7pc last Monday, few would have turned it down, I suspect.
That is perhaps the first lesson to be learned – the remarkable capacity for markets to confound investors' expectations. If the same patterns played out each time, we would have got the hang of it by now. But each crisis is different enough to ensure that history never quiet repeats itself, only rhymes.
I have drawn a few other conclusions from this fascinating week. First, while developed market shares are undoubtedly cheap they may remain so, and for good reason. It is quite unprecedented, that Fed chairman Ben Bernanke should have been prepared to pre-commit to near zero interest rates two years into the future. This speaks volumes about his pessimism regarding America's economic outlook. The persistent unemployment and low growth implicit in his assessment is incompatible with the Government's assumptions in its deficit reduction plan or many of Wall Street's earnings forecasts.
I think we are seeing a change in the investment environment on a par with the birth of the cult of the equity in the 1950s. That was when, for the first time, equities began yielding less than fixed income securities on the grounds that investors considered the growth potential of share dividends outweighed the extra risk borne by equity investors.
In recent years, the rare occasions when equities have yielded more than government securities have been viewed as a buy signal for shares, but in a low-growth, low-interest rate environment, this premium could become the norm again.
Having been disappointed in recent years by the vain wait for jam tomorrow, in the form of capital growth, investors are likely to demand jam today, in the form of a high and sustainable income.
This renewed focus on income makes sense because, as the chart clearly shows, shares paying high dividends are not simply interesting to investors seeking to replace the income they can no longer find in cash or by investing in government securities. Income is both the main contributor to the total return from shares and an excellent indicator of future outperformance.
The chart shows the relative performance of Europe's high and low yielding shares but I could have shown a similar chart for Japan, where income has provided an escape from two lost decades for investors.
Looking forward, careful stock selection will be key to investment success. The sell-off has been indiscriminate and this is throwing up plenty of opportunities: good companies at great prices. I wonder whether we might not look back with some disbelief at a time when BP was available at just 5.5 times expected earnings or AstraZeneca at 5.7 times with a dividend yield of 6.5pc. Investor sentiment, measured using a combination of indicators such as market volatility, directors' dealings and fund flows, last week hit its lowest point since the collapse of Lehman Brothers .
What has also become clear this week is that we now inhabit a two-speed world. The transformation of emerging markets, especially those in Asia, continues regardless of the volatility in Western stock markets. It is interesting that the two worlds' markets have not become de-linked in the same way as their underlying economies have. I would be surprised if that did not change soon. The growth differential between Asia outside Japan and the developed world before, during and since the financial crisis argues for a much greater bias towards the region.
The unstoppable shift from West to East has important implications for stock markets closer to home because a key part of any analysis of companies quoted in London and New York is now their exposure to the growth potential of emerging markets. It is one reason why German stocks continue to look more interesting than their counterparts in other parts of Europe. Companies such as BMW and Siemens have understood and grasped the emerging market opportunity.
Meanwhile, let's hope tomorrow really does bring just another quiet summer week. We could all do with one.
Tom Stevenson is an investment director at Fidelity International. The views expressed are his own.
http://www.telegraph.co.uk/finance/comment/tom-stevenson/8699694/A-week-that-knocked-the-financial-world-off-its-axis.html
http://www.telegraph.co.uk/finance/comment/tom-stevenson/8699694/A-week-that-knocked-the-financial-world-off-its-axis.html
