Investing in a global economy where growth remains fragile
It is easy to succumb to .glum views, but good firms will get through the turbulence, as they always do
It is easy to succumb to the bearish views, but good companies will get through the turbulence, as they always do. Markets overall seem reasonably valued to me, although the US market is clearly overvalued relative to history.
Given the fragility of the global economy, a recession, and an accompanying bear market, is a constant possibility. We must be cautious and respectful of the dangers but, as Buffett’s words remind us, it is always wrong to succumb to fear.
And this can only be good in the long-term or real assets (businesses, property, commodities and precious metals) that cannot be printed in the same way as paper currencies. It is the threat of a permanent loss of capital that we must fear.
Shares in quality businesses and property assets have a claim on the earnings power of these assets, and are not as vulnerable (as bank deposits) to money printing in the long-term.
This is especially true for businesses with a geographically diversified earnings stream and that have decent pricing power. Yes, rising interest rates in response to inflation can depress the value of even quality assets in the short-term, but that hardly represents the threat of a permanent loss of capital over the longer-term.
This environment plays against those saving through bank deposits as inflation slowly erodes their value. We can’t know the future but we can plan for the eventualities. As I see it, inflation is the most likely real risk, and sitting on cash deposits due to fear offers little protection against potentially persistent inflation.
Despite the significant rally in markets since March 2009, personally I still choose equities. A quick example serves to show why; Coca Cola’s share price has been lagging the market this past six months but I noticed recently that its dividend yield for 2014 has risen to 3.3 per cent, due to a lower share price and an ongoing rising dividend.
Coca Cola’s growth rate may be slower now than in the distant past but a 3.3 per cent starting yield plus even 4-5 per cent annual growth in that yield offers investors the prospect of an annual return of 7-8 per cent from one of the world’s strongest and non-cyclical companies.
This beats the pants off bank deposits (near zero returns) and longer-dated government bonds (a German 10-year bond yields only 1.9 per cent and offers no growth).
Rory Gillen runs the online investment newsletter, GillenMarkets.com and is author of 3 Steps to Investment Success