Investments News

Here’s why it’s likely going to be far worse than 2008/09

  • Apr 27, 2020
  • Mark Clubb

It is almost impossible to disagree with all the current scholarly articles typically entitled something like the above. My problem is to a man everyone is apocalyptically bearish. For me they are missing the point. With interest rates at zero, even a dividend yield of 1%, so long as the dividend is nailed on is better than zero. Pension funds need income. They have pensions to pay. Institutional Pension Funds are underweight equities. Typical current allocation is 38%. They will have to buy equities. They can borrow for nothing to buy that income.

I think we could be in a time a bit like the surge in certain equity valuations in the late 50’s to end of 60’s. The "Nifty Fifty". Different reasons back then but still driven by these gargantuan pension funds. Plus, today the “baby boomers” are beginning to retire. The biggest wave of retirees in history. They need pension cheques. And monthly. And they are living longer. By the way they do not fit the "high risk" pandemic category.

Don’t write off the attractiveness of good quality equities. Yes, there will be absolute disasters. Yes, for a huge swathe of the equity markets we are in for a prolonged bear market the foothills of which we have only just arrived in. Banks and financials will take years before they resume dividends. I am bearish of oil and think dividends will disappear and not return to anything like current levels ever. I think utilities will be nationalised or quasi nationalised through Government Regulatory control. Probably 75% of FTSE100 will remain in bear territory for several years. Anyone mention Brexit? Europe is no better by the way.

But I think there is a lot of room for a select group of equities to go higher over the next 2/3 years. What I call the "Div Haves" versus the "Div Nots". For example, Procter and Gamble currently has a dividend yield of 2.5%. The shares are not far off an all-time high. If it yielded 1% that is the shares more than doubling. J&J yields 2.6% and is at an all-time share price high. What happens if they increase that dividend by a token 2% per annum. Forget the p/e. That becomes irrelevant. In a zero-rate world or say 0.5% world the p/e on a bond is 200! (nod to Mr Buffett) Maybe because P&G or J&J are equities, we put them on 100 times earnings or 50. Both J&J and P&G are currently trailing 12-month p/e of 24/25. If you are desperate for the income why not?

I just treated myself to first edition hardback copies of 1984 and Animal Farm.

"Doublethink means the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them."

George Orwell, 1984.

Regarding equities...

“All animals are equal, but some animals are more equal than others.”

George Orwell, Animal Farm.

Thoughts of Comrade Napoleon

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