The world must wean itself from fossil fuels if it wants economic growth without the crippling effects of inflation. There are no viable alternatives except nuclear option but the world is now thinking twice after Fukushima. How? We are packed in a corner with no way out. Either we face the deadly effects of global warming or live with the threat of nuclear fallout. We are on a brink of a great human disaster that can wipe out millions of people in this decade. I shudder... I pray this can be avoided. My passport is ready and my family and I will run first.
Published March 19, 2011
Don't count the stock market out, there's value yet
There are blue chips with expected dividend yield of over 6%; that beats keeping money in the bank
By TEH HOOI LING
SENIOR CORRESPONDENT
WE ARE in very uncertain times now and the catalogue of issues is endless: the seemingly intractable sovereign debt problems and persistent high unemployment in the developed world; the financial aftermath of the devastation in Japan following the earthquake last week; rising food and commodities prices which are exacting a big toll on the lowest strata of the economy; widening income disparity, the gradual shift of economic centre of gravity from the West to the East; rapid urbanisation of hundreds of millions of people; climate change; the fast depletion of resources from this earth. The list goes on.
No one can tell for sure how things will pan out. There could be a lot of unknown unknowns just lurking around the corner. History may not provide much of a reference if we are moving into totally uncharted waters. Still, we shouldn't be paralysed into inaction just because there are many uncertainties out there. For one thing, inaction which involves the clinging on to dear cash may turn out to be a losing proposition given that the worth of cash gets eroded by inflation over time.
Yes, what has happened in the past may be totally irrelevant going forward. But there will always be certain things that continue to make sense. For example, if a company is able to create value and make profit, and there is a chance to participate in its business at a reasonably low cost, a rational person would and should consider doing it.
The next question then is, what is a reasonably low cost? For me, it would be one that would give me a significantly higher return than other available alternatives at the moment.
The price would also have to be low enough to give me some assurance that it does not have much room to go down further, and cause permanent loss to my capital. In this respect, history, for better or worse, provides us with some benchmarks to look at. Robert Shiller, professor of economics at Yale University, popularised a market valuation metric where the current market price is measured against the average earnings per share (EPS) of the last 10 years. This will even out the cyclicality of earnings.
Today, the ERP is at 7% - a reasonably good level from which the market had chalked up decent gains, going by the past. We were at similar levels back in July 2009, February 2008, December 2005 and January 2003.
I tested that out on the Straits Times Index, the one calculated by Datastream, which goes way back to 1973. In Chart 1, you can see that from 1983 till now, the STI trades between 10 times and about 35 times of its average past 10 years' EPS. We are now at 17.7 times earnings, or about one standard deviation below the average multiple that the index traded at in the past 40 years or so. Hence, at current levels, stocks can't be said to be expensive, but neither are they a screaming buy. We are now at levels last seen in mid-2003, early 1999, late 1997, and early 1991.
How about the equity risk premium (ERP)? This is a measure of the expected return of an equity investor over and above the risk free rate. I use the earnings yield (the inverse of price-earnings ratio) minus the one-year interbank rate as a proxy for ERP. The higher the ERP, the higher the supposed return for holding equities.
In Chart 2, you can see that the ERP shot through the roof - it went as high as 19 per cent - in March 2009, just before the capitulation of the market following the global financial crisis. That's the highest the measure has been in its 24-year history, and that also proved to be one of the biggest buying opportunities of all time.
Today, the ERP is at 7 per cent. Again, that's a reasonably good level from which the market had tended to chalk up decent gains, going by patterns in the past. We were at similar levels back in July 2009, February 2008, December 2005 and January 2003.
And finally, the dividend yields of a number of Singapore stocks are still expected to be juicy based on analysts' expectations. I downloaded the data from Bloomberg and categorised the stocks based on their market capitalisations.
Among big cap bluechip stocks, we can find more than 10 which are expected to deliver more than 6 per cent in dividend yield. That beats keeping money in the bank, and it outpaced the expected inflation rate for this year as well. Among the stocks are StarHub, Mapletree Logistics and Ascott Residence. There are also many smaller companies which are paying much more generous dividends. The caveat is of course the sustainability of their payouts.
Finally, just a reminder that the list we provided is based on the screening from Bloomberg. Investors are advised to do their own analysis on the individual companies before deciding to pick up any of the stocks.
The writer is a CFA charterholder
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