Posts tagged ‘FTSE All Share’
About a month ago, as the situation in Ireland continued to deteriorate, an informed commentator observed that the euro faced a battle for survival:
The first year of the Lisbon Treaty has been clearly marked by the crisis of the euro zone. It was not a period of vision, it was a period of survival; it’s not finished yet.
Who was this prescient figure? Some eurosceptic economist, perhaps? A scaremongering journalist?
Actually that quotation – and much besides – comes from a speech given in Brussels by “President of Europe” Herman Van Rompuy on 16 November, twelve days before EU leaders agreed the structure of Ireland’s famous bailout.
The Irish rescue package has been taken by some as evidence that the euro cannot survive. They worry that the single currency is serving too many masters with vastly different economic needs, and that it must collapse (perhaps by means of a German exit). Greece, Ireland … Portugal next? How long can this continue?
Now it is correct to note that the one-size-fits-all interest rate that goes along with single currency membership has caused problems over the years. In 2004-5 a rate of 2% was perfectly appropriate for Germany, for example, where inflation was contained at 1-2% and the economy was emerging but sluggishly from recession. In Ireland, however, where inflation was around a point higher and growth was sprinting along at 5%, such a rate was far too low.
Such imbalances, however, are inevitable in any economy. The US, for instance, comprises fifty states with vastly different growth and deficit positions. The more indebted of them face the prospect of default. For taxpayers at large, bailing out irresponsible borrowers will be no more palatable in America than it has proved on the Continent. Yet who is talking about Illinois abandoning the dollar?
Europe’s leaders have been acutely aware of the risks to their currency throughout the period of turmoil. To interpret their agreement of massive inter-state bailouts and emergency central bank support as a sign of structural weakness is to precisely misread the reality of the situation.
A year ago it was possible to ask, “what would Germany do if asked to bail out Greece? Will the euro survive a sovereign crisis?” Well, we have had two such crises now. The strong states have stood four-square behind the weaker ones, and four-square behind the euro.
Of course, sovereign defaults are terrifying. Market participants are rightly fearful of them, and market prices have moved in response. The euro is some 9% weaker on a trade weighted basis than it was at the start of the year, and the stock markets of Greece, Ireland, Portugal, Italy and Spain have all taken various degrees of battering.
But the French and German markets are up. In fact, the DAX has comfortably outperformed the All Share and the S&P 500.
Above all, the euro has survived – and the events of this year suggest that it is more and not less likely to continue to do so. As another European once observed: that which does not kill us, makes us stronger ..
Needs must as the deficit drives.
Reports over the weekend indicated that the government are considering a much more broadly based sale of state assets than had been envisaged by the previous regime. Ways of extracting value from government-owned property – whose worth has been estimated at some £370bn for some time and could be much higher – are apparently being examined with “fresh urgency”.
Let’s put that number into context.
Land Securities, Britain’s biggest property company by market cap, had just over £8bn of fixed assets on its March 2010 balance sheet. At the time of writing, the REIT sector of the FTSE All Share index, which contains Land and most of the other major players – British Land, Hammerson, Segro and the rest – has a combined market cap of a little under £23bn. And the 3,600-plus properties tracked by the Investment Property Databank (IPD), information wizards of the commercial property sector, are worth around £33bn according to their latest figures, which they estimate represents over 90% of the combined value of property assets held by UK unit trusts and investment funds.
Talking of the IPD figures – out yesterday – they show a continued drift lower in yields, to an annualised 6.9% in September down from 8.5% a year earlier. And capital growth has slowed too, with commercial property rising 3.9% in value over the first quarter of this year, 1.9% in Q2 and only 0.5% over the three months just gone.
It’s true that a rise is still a rise, and an income return of 6.7% doesn’t look at all bad right now (especially when glancing across at the bond market). But commerical property, like its residential counterpart, is in a relatively fragile state.
You can see where this is going. A mere 10% of the estimated value of the government’s estate is worth vastly more than the combined worth of our biggest property companies. Selling it in an 80s-style democratic privatisation – one of the options under discussion – would require investors to commit more additional capital to commercial real estate than they currently have invested in the asset class in toto.
So attempting anything on that scale looks impossible. The more manageable the size of the planned sale, however, the less point there is in the government bothering. It’s quite a tightrope to walk. And we still don’t know how much property the banks and the structured finance sector might have to offload at the same time.
Consider all this together with the Bank of England’s £200bn gilt overhang (and rising?), and you might be forgiven for thinking that our masters are trying to unnerve UK investors on purpose …
A question we have been asking of bond yields lately. Buoyed in part by the lacklustre performance of equity markets this year, and apparently by all that talk of “double dip”, bond yields have in some places reached record lows.
The UK is no exception. The benchmark ten year gilt closed at 2.79% on Wednesday – a new all time record low, lower than the 2.95% seen in March 2009 and lower than inflation (by 0.2% on the official CPI measure and almost 2% on the old RPI). It is also lower than the dividend yield on the FTSE All Share Index – substantially so, as the latter stands at 3.4%.
Ten year rates are not alone, with thirty year yields of around 3.85% within sight of the all time low of 3.7% seen at the end of 2008. The index linked market has been pushed higher amid the fray as well, with the real yield on the 1.25% 2017 flirting with negative territory for the first time.
All this looks a bit like hysteria to us. Bonds yielding less than inflation? Less than equity dividends? Less than they did in the teeth of the severest recession since the Second World War?
Of course, much of this was true half a percent ago. And nobody knows how far the forces behind the recent rally may continue to push it.
So let’s remember a few details outside of the valuation picture too. Like the £200bn of gilts sitting in the Bank of England’s vaults that will have to be sold into the market at some point. Or the c. £150bn on course to be borrowed by Her Majesty’s Government this fiscal year, and the substantial borrowing to come in the years after that. (Ten years ago, £200bn was the size of the entire gilt market, excluding index linked.) And the base rate, still being held at an unprecedented emergency level, won’t stay there forever.
These headwinds, combined with the terrible valuation data, surely present the bleakest of outlooks for the gilt market. The trend may be your friend, but in the case of the bond market, we’d say it’s the only friend you’ve got.
Among the most interesting data available to follow are historic stock market earnings. (Well, when we say available, if you have access to a source of historic price / earnings ratio data for a given equity market index you can invert it to give an earnings yield and then multiply this yield by the index level (price) to give reported earnings for that market.) They give a picture of corporate health across entire countries or regions, depending on the index used, and are a useful shorthand for what investors in equity markets actually own.
Corporate profitability is a volatile and vulnerable quantity. In the wake of the dotcom boom for instance, reported earnings for the S&P 500 sank to multi-decade lows in real terms, before recovering again after only a few years.
These reflections were prompted by the news this week that BP’s “static kill” operation appears to have succeeded in permanently sealing its damaged well in the Gulf of Mexico. On the day that BP reported its record second quarter loss – 27 July – historic earnings for the FTSE All Share Index fell by 13%.
BP was not the only company reporting that day, of course, so if the recent (upward) trend in earnings was reflected across the wider market on the same day the figure of -13% would understate the impact of that single company’s reported earnings on the entire index.
Looking at that index-level data alone would not provide enough information to distinguish between a market level event, such as the collapse of the 1990s technology valuation bubble, and a (mere) stock level event such as the evisceration of BP.
As it happens, in the week or so since, earnings in the UK market as a whole – notably in the major banks – have risen to such an extent that they have now returned to their level of July the 26th.
All of which goes to show that it behoves any user of economic and market data to remember that every wood is made up of a series of trees: it is not advisable to base decisions on any aggregated series without considering its component parts.