Just a quick update on these as they all remain in bullish territory. The FTSE 100 chart shown above, in common with the broader indices such as the All share and FTSE 350, remain around 4 to 5% above their moving averages. While the Mid 250 & Smaller Cap indices had a stronger April and therefore remain 9% ahead of their averages.
Meanwhile the Trump reflation trade still seems to just about be running, although it seems to me that he has U-turned on most of the things he said or promised and does not actually seem to have delivered much in his first 100 days apart from some unfunded tax proposals as far as I can see. Despite this the other economic indicators that I track along side these moving averages on the markets are all still in positive territory.
So for now the trend remains your friend and it looks like it won't be a year to sell in May and go away, although given the run we have had so far this year some sort of pause for breathe or a small correction in the short term wouldn't come as a great surprise to me, especially in the run up to the election in the UK. Having said that though I read some research recently suggesting that the outcome of elections does not have much bearing on subsequent market returns, so as an investor I won't be worrying too much about the outcome of the UK election.
We had interim results from Character Group (CCT) yesterday, which I last wrote up here back in September last year. Then I suggested it could provide 20%+ returns if it managed to make it back to the top of its trading range at 550p. It managed this in March so you would have been able to lock in a decent return if you managed to sell them up there. Since then they had OK final results & a slightly disappointing trading update in January when they flagged that their H1 numbers would be down due to US$ cost effects. Despite this they said they were confident of meeting full year numbers.
The interims yesterday confirmed this fall in profits in H1 as expected and they reiterated their confidence in meeting full year estimates despite this and backed this up with a 28.6% increase in the interim dividend from 7p to 9p. Looking at the pattern of their recent dividends these have gone sequentially 5, 6, 7, 8, & now 9p so with a bit of straight line forecasting I think they might do a 10p final given their progressive policy, cash balances and high cover levels. This would give 19p for the full year versus current forecasts of 16.8p for this year and 19.5p for next year. This would give a yield of around 4% at current prices.
I also note in the chart below that the management have been fairly active buyers of the stock on dips and they were buying again recently and after yesterdays interims, suggesting they have some confidence in their forecasts / prospects as they seem to be able to forecast the swings in their business quite well.
Summary & Conclusion - This appears to be a well managed company which has developed quite a good record of delivering decent profits, earnings, cash flow and dividends in recent years, although longer term it has had its ups and downs. Consequently the market seems reluctant to afford it a decent rating and therefore a dramatic re-rating (outside of a bid) does not seem to be on the immediate horizon. They have however achieved a rating of between 10 & 12x in recent years, so if they do manage to hit forecasts for this year then this would suggest the price could get up into a 520p to 620p range, so a return at least to the top of its range / resistance at 550p / 560p does not seem too much of a stretch.
On the downside it could drift off further to the bottom of its range around 430p in the short term in response to these numbers, but I think that would be an even better buying opportunity if it happens. Of course they may be over optimistic and miss the full year numbers, in which case it would probably break down out of its range.
As you may know from some other posts in the past, I am generally a buy and hold kind of investor who does not generally try to time the market. This is because timing the market is incredibly hard to do and I also prefer to allow time in the market and the power of dividends and compounding to work their magic. See a good piece from a useful website called 7 Circles for more on this.
However, with equity markets around the world flirting with all time highs as I write and with the US Federal reserve about to raise interest rates for a third time, I cannot help but start to feel a little nervous. This is compounded by the fact that US equity valuations in particular are looking somewhat stretched and towards the top of their range. Now while this in itself is not that helpful as a timing indicator, it does suggest however that returns from US equities may not be that great from this point. There was a good post discussing this in more detail which can be accessed by clicking the image below.
Thus given where Sterling has fallen to against the US Dollar I certainly would not be chasing US equities up here especially as the old saying goes - "don't fight the Fed." Nevertheless UK equities still look less stretched, but would not be immune to a shake out on Wall Street if the current rising rate cycle should lead to problems down the line.
Interestingly Neil Woodford put out a note pointing out the attraction of dividend yields in the UK Market and the benefits of taking a longer term view which reduces the risks of suffering losses, although he does have a new fund to sell - so he would say that wouldn't he? Nevertheless the article in the link above and an earlier piece a colleague of his did called - Are UK Equities Overvalued? - are both worth a look. In particular the second one suggests that the UK could offer 8% real returns based on its current valuation, but does caution that this could be undershot as it has been in recent decades. Interestingly Research Affiliates 10 Year Expected Returns analysis shown above also seems to confirm this and suggests you should probably invest anywhere except the US.
If you are taken by his arguments and evidence of the benefits of investing for the long term, then his new fund, the CF Woodford Income Focus Fund, will be available for investment from 20th March 2017, with the launch period closing at midday on 12th April 2017. Alternatively if you want to go your own way and do it yourself to save the fees, then don't forget the Compound Income Scores are available to help you identify good value, quality growing dividend stocks for further research.
Summary & Conclusion
Another old saying is that the market climbs a wall of worry and it may be that I'm worrying prematurely about rising US interest rates plus the fact that while valuations can be a good indicator of future returns they are not very good as a timing indicator.
Talking of which the timing indicators that I follow like the trailing 10 month moving averages, US Unemployment and PMI data plus general economic news are all still generally supportive. Thus despite the high valuations in the US, given the current economic background and the reasonable valuations in the UK, I'm inclined to extend my time in the market further and carry on compounding my dividends.
Of course if the US does catch a cold then the rest of the world will probably get influenza and likely lead to some downside when and if that happens. However this would then likely throw up more opportunities and an even better entry point in terms of timing and valuations.
While all the attention seems to be focussed on the Self employed and their National Insurance payments, little or no comment has been made about the effects on investors.
It seems that investors have been caught in the cross fire of the attack on the tax savings available to the self employed.
Thus the £5,000 dividend allowance, which everyone seems to have forgotten, was introduced to make up in some small way for the scrapping of the dividend tax credit last year is being reduced to £2,000 after just a couple of years. Largely because this is how many self employed chose to pay themselves thanks to the tax advantages. Consequently whereas most investors would not have previously been affected by the tax credit change, this will now potentially bring far more investors into the net to pay tax on their dividends.
Thus this highlights the on going benefits of other tax shelters for longer term savings such as SIPP's and ISA's. Thus if you can't afford to make use of the new higher ISA allowance of £20,000 for the next tax year, then it would make sense to sell down in your taxable portfolio and use the proceeds to top up your SIPP or ISA to avoid getting hit by tax on your dividends, if you are not already in that situation.
Meanwhile the small sop to savers in the shape of the 3 year savings bond doesn't look that generous as it will probably hardly keep pace with inflation. Nevertheless I guess it may be competitive with private sector providers and is at least backed by the government.
Any way that's enough of a rant from me you can see more from the BBC here on how the budget might affect you including a helpful table looking at how much extra tax you could be liable for on your dividend, depending on the size of your portfolio and with an assumed 4% yield.
....no not a remake of a dodgy British comedy but still the message from the Monthly timing indicators for the UK market. If anything these have got even more extreme / bullish since last month was another strong month and a lower figure was dropping off the front.
Consequently FTSE 100 is now some 7.5% above the 10 month moving average, although this is not as extreme as the 9%+ levels it reached in August and September last year which didn't stop the market marching onwards and upwards after a brief wobble in November post the Trump election victory.
Talking of which it seem to me that the markets continue to be taking a rosy view of his likely policies while ignoring or down playing the possible negatives in the short term. It has obviously led to hopes of stronger growth in the US and globally and as such led to a rotation from defensive towards more cyclical companies and from bonds towards equities generally, as higher inflation and interest rates are also seen as a probable outcome of this more positive growth outlook.
I can't help feeling that markets are getting a bit extended and may be even complacent and that some sort of reality check or temporary pause for breathe may be over due, but as ever I guess time will tell on that. For now at least the moving average and economic indicators that I follow are all still giving a green light so maybe the recent trend will continue to be our friend?
Meanwhile the CIS Portfolio has continued its strong start to the year with another 5.8% rise in February for a slightly better level of outperformance to January of +2.9%. This puts it ahead by 5.7% in the year to date and leave the CIS Portfolio up by just over 31% since inception which is some 16.5% ahead of the All share since April 2015.