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.
Given the year end rally in equity markets which extended into the New Year, the recent set back has only taken FTSE 100 back to where it was around the start of the year.
Consequently this has not dented the bullish trends in the moving average based indicators that I have been following for a while now. Thus the main larger and broader indices like FTSE 100, 350 and All Share are still as around 6% above their moving averages. The Mid 250 remains a slight laggard being only 5% above its average, while the rally in the Small Cap index has now left that index the most extended at 8.4% above its moving average.
The other economic indicators that I follow are also still supportive of a bullish trend for equities as the latest US Unemployment figures, which were out today, saw the rate tick up to 4.8% which is still below its moving average, which is positive in this case. While the US ISM indices for Manufacturing and Services are both still comfortably above 50 which also indicates an on going expansion.
So in conclusion the UK Market timing indicators are all still saying stay bullish / invested - so I say - keep calm and carry on compounding.
Happy New Year and welcome to 2017. I don't know about you but as an investor I'm quite glad to see the back of 2016 as on the whole at the headline index level returns were good it was not an easy year for investors generally with all the twists and turns and volatility. Indeed with all the noise and fear around it would have been easy for investors to panic out at the bottom or waste time and money trying to hedge, although no doubt some super clever market timers or traders with very focussed portfolios may well have done extremely well if they timed all that perfectly.
With that said I'm pleased to be able to report that the Compound Income Scores portfolio (CIS) had another positive month in December with a total return of +4.15%, although this lagged slightly behind the return of 5% for the month from the FTSE All Share which I use as a benchmark.
For the year this left the CIS up by 4.34% but this was way behind the 16.75% produced by the FTSE All Share, although the portfolio is still ahead of the index by 9.5% since inception or a little over 5% per annum on an annualised basis based on the short 1.75 years so far.
In absolute terms it has produced a total return of 21.05% since inception which works out at 11.5% per annum on an annualised basis. This may not seem that spectacular but I would regard it as satisfactory against the real returns of 5 to 6% which have been seen from investing in UK Equities over the very long term. This is a figure I would use to judge my own performance in the long run as my own portfolio and that of the CIS differs substantially from the headline FTSE indices.
On performance comparisons and Benchmarks I note what Ed Croft on Stockopedia had to say in his NAPS annual review and his thoughts about an equally weighted benchmark, which would be pretty easy to do, so I hope they do go ahead and introduce those. Aside from that I also note that his random set of 100 portfolios of 90+ Stocks on the Stockopedia stock ranks did between -5% & +5%, see histogram below.
One other crumb of comfort I take in this years performance is this report which says that Neil Woodford and his highly popular income fund underperformed the FTSE All Share index by 13.56% with a total return of 3.19%. So at least I can say the CIS Portfolio beat Neil Woodford on a one year view. This just bears out the point that any portfolio which is markedly different from the index in terms of its make up will be likely to diverge from it significantly in both directions - that is to be expected. So overall while the returns seem a bit disappointing this year on the face of it, I take some comfort from the above and I don't get too hung up about performance relative to the benchmark in individual years as it is a marathon and not a sprint.
As to 2017 my crystal ball is a bit frosted up at the moment, but at least for now it seems that investors are giving Trump and his policies the benefit of the doubt and seem to be discounting a pick up in growth and inflation which may or may not be helpful to equities depending on the extent of it. They do however seem to be ignoring some of the risks to World trade and the potential for further protest votes against other political regimes in the year ahead, but as ever time will tell. For now it seems an economic slowdown in the US has been postponed and the market timing indicators I follow are still positive, so it seem sensible to keep calm and carry on investing in equities. Good luck with your investing in 2017.
Finally please note this report and these returns are based on the Compound Income Scores which are designed to help identify attractive income growth stocks and an associated portfolio. These are a subscription based, although they are currently closed to new subcribers. If you would like to add your name to the list for when they are next available for subscription then please get in touch using the contact form.