The view towards the end of the year

Following on from the trend set in 2012, equity markets have remained the primary sector of choice for cash investors looking for solid returns coupled with relative security.

The US Federal Reserve has maintained its policy of injecting $85 billion on a monthly basis, and although these funds have been directed at the debt markets the vast majority have found their way into equities. For the year to date, the US has pumped in $850 billion. It is debatable how much higher this has forced equity markets, but one thing is certain: it has given equity traders the confidence to predominantly maintain a buy-on-dip mentality, secure in the knowledge that there is a safety net below them.

At the end of the first six months of the year there was a growing feeling, in view of the general health of the US markets, that the Fed would announce an initial reduction of its monthly stimulus package. However, before this could happen, along came the deadline for the US government, Senate and Congress to agree a policy for the nation’s budget and impending debt ceiling. This caused such disruption to the economy and confidence that the chances of tapering happening in 2013 have greatly reduced.

Focusing on the US and European markets, we can see that investors have been rewarded with both an income and capital return as the troubles of 2009 fade into the distance.

US and European indices

Index

Dividend yield

Index % change

Dow 2.15 19.34
S&P 500 2.00 23.96
NASDAQ 1.43 30.37
FTSE 100 3.63 14.53
DAX 2.99 18.56
EU Stocks 50 3.56 15.81

Of course, all good things must come to an end, and the popularity of equity markets will eventually be eclipsed by another investment sector. However, currently there are very few viable options holding up their hands for consideration. As far as equities are concerned, dividend yields are reliant on income streams from the parent companies. And a derailing of the fragile recoveries in the EU, US and UK is possible. Sooner or later, the Fed will start reducing its fiscal stimulus package, and when the stabilisers are removed we will see if equity markets are ready to ride all by themselves.

So what about the debt markets? Due to a combination of increased debt, weaker economies and in many cases lower levels of power and decision-making capabilities, many countries have seen their government debt downgraded by the debt-rating agencies. Although they broadly remain, at lower levels of risk to equity investments, the disparity between the two sectors has been greatly reduced. A look at the some of the returns currently on offer in the sovereign debt market might explain why equities have been so popular.

Sovereign debt yields

Country

Yield

Italy 4.15
Spain 4.06
UK 2.64
Germany 1.70

Historically, the last couple of months of the year have proved to be profitable for those trading the equity markets. However, that is no guarantee for the future. President Obama has kicked the can far enough into 2014 to ensure there should be a window of relative calm. Equities will not be hindered by overhanging US debt ceiling issues, and the US corporate reporting season is out the way, so we are free from two issues that might rock the market. 

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