“Just as investors should be breathing a post-Brexit sigh of relief, there remains a feeling of uneasy calm in markets, and a fear that somehow a correction is just around the corner,” said CIO Guy Monson.
He lists three topics preoccupying market bears: that US profits are fading; cash and bond yields are gradually moving higher; while geopolitical risk remains elevated with a tight US election, a critical Italian referendum and the implications of Brexit.
Monson said: “Certainly corporate profits are now starting to fade. US pre-tax earnings fell 4.9% in the second quarter of 2016 – the fifth consecutive decline and the worst streak since the end of the recession in mid-2009, according to Department of Commerce figures.
“At the same time, the historic price-to-earnings ratio of the S&P 500 is over 20, and close to a seven-year high. Much of the weaker earnings can be attributed to weaker profits from the energy and mining sectors, and to the lagged impact of a stronger dollar.”
He is also points to what he sees as a “worrying” reaction to the Bank of England’s plans to buy corporate bonds for the first time.
“If this was designed to promote resurgence in bond issuance, then it has already succeeded,” he remarked.
“New sterling corporate bond supply totalled £13.7bn in the six weeks following the BoE meeting – up from £9.3bn during the whole of the first half of 2016. So far in September, new sterling issuance is running at over four times the level in the comparable period a year ago.”
He added: “While we see little risk of yields backing up aggressively, we see little opportunity for meaningful real returns either. Investors must surely turn to equities for their income requirements, as their yield premium over bonds is close to fifty year highs in most of the eurozone, Japan and the UK.
“Dividend payout ratios are rising, especially in the UK, so strong cash flow generation and robust business models are key.”
However, in Sarasin’s view the “real winner” from artificially low global bond yields is still the equity of high quality, global businesses that believe in progressive dividend growth.
With this in mind, despite, recent market gains, the wealth manager is retaining its core weighting in global thematically driven equities, but it has increased the income tilt and earnings visibility of its holdings.