20th November 2014
Investment expert and director at Seven Investment Management Justin Urquhart Stewart explains why investors need to play a longer game…
Time to take a longer view I think. The papers seem to be full of pundits predicting that “the end is nigh” for stock market valuations at their current level. The auguries being cited seem to cover everything from the black arts of the Chartists, through to references to the “hallowed investment gurus” whom you are not able to criticise.
From crossed graph lines to the interpretation of “Buffetery”, I am sure someone will soon be referencing the rooks flying over the City before long. So yes there will be a stock market pull back or even crash – but when nobody, of course, actually knows.
When it happens there will be no doubt one who called it right, but that will be likely to be amongst the very few and the very lucky. The real question is actually – does it matter?
Of course if we were to see a meltdown of catastrophic proportions then it would be devastating, but history does show us that this is a rare event – very rare. However, over the past 14 years we have seen some yawing and sickening movements up and down with all the stomach churning of a roller coaster – especially in the FTSE 100. A couple of recessions, a black swan or two floating by and a global banking crisis are usually enough for anybody. But for all this, what has happened?
Well as you can see from the graphs below, actually the FTSE 100 has lost money over that period. So after all the roller coaster of recovery, austerity and reconstruction, we still haven’t reached our peak of the last day of 1999. How depressing.
Actually you shouldn’t be depressed. If you look at the second graph you will see a good steady trend and in fact if you had included the dividends, then instead of losing 4.8% over 14 years you would have made a relatively healthy 56.6%.
The fact is that in most cases your dividends and their reinvestment are more important than the vagaries of individual stock movements. Dividends may sound dull but just look how much they contribute each year.
In 2012 the figure for dividends paid was just over £80bn, reducing marginally the following year to around £79bn. That is the equivalent of a new BP, Unilever or Glaxo each year. Forecasts this year are for an increase to around £100bn, but there has been the £15.9bn special dividend from Vodafone included in that.
The top five dividend payers in 2013 were Shell, Vodafone, AstraZeneca, BP and Glaxo, accounting for £7.5bn.
This should be regarded as being even more surprising when you consider that one of the traditional and usually “reliable” dividend and income providers to the market has effectively been destroyed, at least for the time being. Gone are the days when we used to be able to “rely” upon these nice little earners coming through from the banks – and especially the respectable income that was the Lloyds’ dividend which regularly seemed to pay more than double its best deposit rates. Those days are gone and in fact may never return – certainly in that form again.
Chart 1 FTSE 100
Source – Bloomberg
Chart 2 – FTSE Total Return
Source – Bloomberg