Here's a brief belated update to the start of August rather than the end of July as I was away on a short break at the end of the month. It was another good month for the CIS Portfolio which was up by 4.9% versus the 1.8% for the FTSE All Share Total Return index. This leaves it up 24.2% YTD & 50.3% since inception or 19.2% per annum on an annualised basis. These figures are all ahead of the various UK indices as per the graph above, but then everyone is probably having a wonderful time swimming in the warm waters of this on going bull market aren't they? Mind you as dear old Warren Buffet says - we'll find out who has been swimming without trunks when the tide goes out. At least the CIS Portfolio still looks good value after this months trades as it sports a forecast PE of 13.7x with a 3.5% forecast yield based on expected dividend growth of 14% for the current year.
Talking of the total return indices above the latest Monthly timing indicators based on these remain about 5% above their averages in the case of the headline indices such as FTSE 100, while the Mid Cap and Smaller indices are further above their averages by about 7%. So these and the on going strength in US employment data and robust PMI indices suggest that the tide is still with investors so it should be safe to continue to go with the flow for now without protection and as the old saying goes the trend is your friend, so carry on enjoying it while it lasts.
So here we are half way through 2017 already and what an eventful year it has been so far. Having said that however, it has been quite a reasonable period for equity markets generally including the UK. As you can see from this table all the main UK indices have produced positive returns over the last quarter, half year and twelve months. Despite all the headlines about FTSE hitting new highs recently and outperforming due to sterling weakness, it is interesting to see it bringing up the rear over the year to date and indeed over most of the periods covered here. Indeed it seems that returns have generally improved as you go down the size scale.
The only negative returns have crept in during the last month, which given the political turmoil after May's unexpected massacre at the polls in June, it is probably not a great surprise to see some profit taking set in. In addition some signs of an economic slowdown on the back of the on going squeeze on real incomes from rising inflation and this political uncertainty has probably also not helped sentiment in the short term.
So that brings me on nicely to update you on the Monthly timing indicators that I follow for the UK Total Return Indices, which are based on comparing them to their moving averages and other economic statistics. Despite the falls last month these are all still in positive / stay invested territory. Given the returns over the last 12 months discussed above, it is no surprise to see the smaller indices furtherest above their averages by around 5 to 7% while the broader headline indices such as the All Share & FTSE 350 are around 4%
above as is the FTSE 100 as shown in the graph at the start of this post.
Economic statistics, despite the recent slow down in the UK, such as IMS indices and the US Unemployment rate all still supportive of a continuation of the bullish trend for now.
That's all for now as it is Saturday and the sun is out, but I'll try and do an update on the CIS Portfolio next week, although the graph and data table link are be up to date if your interested in those.
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.
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.
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.