FWIW I take the view that we're in a Bunny market (Bear) - a sideways ranging period that started in 2000 that's likely to continue to 2013 to 2015.
Why? Well generally, for reasons I wont go into here, stocks provide a capital gain that paces inflation over the longer term, coupled with a dividend income that equals cash rate and also rises with inflation over time (cash in turn tends to equal inflation). (Another influencing factor however is trading costs and taxation methods that result in different countries exhibiting different stock market characteristics (for example the US income taxation generally results in different stock price/income characteristics to that of the UK)). We can use this to our advantage and make longer term estimates accordingly.
At the height of the dot com bubble in 1999 the UK's FT100 index dividend yield fell to 2.1% when the FT100 hit 7000 highs. That 2.1% yield is substantially down from the 4% to 6% longer term average.
In the Nineties earnings and yield expectations were high from the Tech companies. Billions were ploughed into those expectations and subsequently lost.
To recover and revert back to a 4% to 6% longer term average yield, 7000 index value and, in this case, assuming 3% to 6% inflation involves a progressive price motion along the lines indicated in the following chart.
The alternative would be to endure a short sharp shock event - such as a Wall Street Crash or 1970's type financial crisis event - which the government is under pressure to avoid.
We see from the chart that prices are falling inline with what might reasonably be expected. For the current 2008 year lows of 4100 wouldn't be out of the ordinary, so there's still some considerable potential declines that may occur over the shorter term, but if so then likely a later recovery back to present levels might equally follow. Anything above 6800 in the current year would be tending towards very expensive levels.
On a stochastic basis, given projected 4100 low, 6800 high for 2008 and 5600 current
( 5600 - 4100 ) / ( 6800 - 4100 ) = 0.55 (55%) so we're placed around midway between projected year low/high levels.
Assuming prices recover back to 7000 in 2013 then from present 5600 levels and 5.5 years to run = 25% gain over 5.5 years or 4% p.a. capital gain. Coupled with a current 3.5% dividend = 7.5% p.a. average.
So overall I'd say UK stocks are reasonably priced, not particularly worth adding to at current prices, but equally not worth worrying about reducing either.
We're in a period where range (AIM) traders are more likely to fair better than buy and hold. An alternative would be to seek out potential better growth elsewhere - countries not enduring Bunny market conditions at present.
Clive
Why? Well generally, for reasons I wont go into here, stocks provide a capital gain that paces inflation over the longer term, coupled with a dividend income that equals cash rate and also rises with inflation over time (cash in turn tends to equal inflation). (Another influencing factor however is trading costs and taxation methods that result in different countries exhibiting different stock market characteristics (for example the US income taxation generally results in different stock price/income characteristics to that of the UK)). We can use this to our advantage and make longer term estimates accordingly.
At the height of the dot com bubble in 1999 the UK's FT100 index dividend yield fell to 2.1% when the FT100 hit 7000 highs. That 2.1% yield is substantially down from the 4% to 6% longer term average.
In the Nineties earnings and yield expectations were high from the Tech companies. Billions were ploughed into those expectations and subsequently lost.
To recover and revert back to a 4% to 6% longer term average yield, 7000 index value and, in this case, assuming 3% to 6% inflation involves a progressive price motion along the lines indicated in the following chart.
The alternative would be to endure a short sharp shock event - such as a Wall Street Crash or 1970's type financial crisis event - which the government is under pressure to avoid.
We see from the chart that prices are falling inline with what might reasonably be expected. For the current 2008 year lows of 4100 wouldn't be out of the ordinary, so there's still some considerable potential declines that may occur over the shorter term, but if so then likely a later recovery back to present levels might equally follow. Anything above 6800 in the current year would be tending towards very expensive levels.
On a stochastic basis, given projected 4100 low, 6800 high for 2008 and 5600 current
( 5600 - 4100 ) / ( 6800 - 4100 ) = 0.55 (55%) so we're placed around midway between projected year low/high levels.
Assuming prices recover back to 7000 in 2013 then from present 5600 levels and 5.5 years to run = 25% gain over 5.5 years or 4% p.a. capital gain. Coupled with a current 3.5% dividend = 7.5% p.a. average.
So overall I'd say UK stocks are reasonably priced, not particularly worth adding to at current prices, but equally not worth worrying about reducing either.
We're in a period where range (AIM) traders are more likely to fair better than buy and hold. An alternative would be to seek out potential better growth elsewhere - countries not enduring Bunny market conditions at present.
Clive
Stocks/Bonds/Managed Futures
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