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Multi-manager view

Golden autumn

Back in August, we were reading that September and October were notoriously more challenging months for stockmarkets and this year was not expected to be much different. Fixed-income investments remained the momentum trade and we were led to believe the cult of the equity was dead.

Just weeks on and the doomsday merch-ants have been sidelined. QE2, is upon us. Equities have responded and fixed-income investments stopped in their tracks.

Looking at major equity indices, we see since the end of August gains generally range between 10 and 15 per cent in sterling terms to early November, Japan being the exception with a gain of just 0.4 per cent. Fixed income, on the other hand, has been broadly flat, with the FTSE British Government All Stocks losing money. High yield, with its equity-like characteristics have been a better market, rising by just over 3 per cent.

Forecasts still cover a wide range on both the economy and the stockmarket. Equities have had a good run but on any reasonable long-term investment horizon they seem to us to offer the best total return potential. It is worth pointing out that you have to go back to September 25, 1997 before equities, as represented by the FTSE All Share index, were a better investment than Libor one-month deposit on a total return basis. This is extremely unusual and the chances of this improving over the next few years must be very good. Even more likely is the outperformance of equities on a total return basis over bonds of pretty much any type. Again going back to September 1997, the British Government All Stocks index was up by 124 per cent, outperforming the All Share index by over 40 per cent in absolute terms.

Other factors that give us confidence in being more upbeat on equities are the fact that generally dividend yields are above 10-year bond yields and this has always tended to mark a positive turning point. Dividends are starting to rise again while M&A activity is also a support.

We may have already had the year-end rally but if we get any further signs of growth improvement for 2011, equities should, relatively speaking, really start to improve.

Gary Potter is co-head of multi-manager at Thames River Capital

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