Excerpt dd. 30/April:
'Yield appeal: stocks’ gap over gilts widest since WW2
Saracen fund manager Scott McKenzie lured by yield gap between UK stocks and gilts that has reached the highest level since the Second World War.
Saracen fund manager Scott McKenzie has hailed the 'increasing compelling' opportunity in UK dividend stocks, as the yield gap with gilts stretches to its highest level since the Second World War.
McKenzie, manager of the Saracen UK Income fund, said income stocks were now being priced 'extremely favourably compared to gilts'. 'We have seen an exceptional period for growth investing in recent years and we are now seeing some significant value opportunities emerging in certain parts of the UK stock market,' he said. 'There has never been a bigger yield gap between the two asset classes since the Second World War. Taken together, there is now an excellent opportunity for value investors in the UK to acquire undervalued shares with an attractive income stream.'
He highlighted the 246 basis points gap between the yield on the FTSE All-Share and 10-year gilts in his first quarter update to investors. That gap has now been trimmed slightly to 234 basis points after a strong month for the UK stock market, with the FTSE All-Share yielding 3.78% and 10-year gilts 1.44%. Uncertainty created by the UK’s planned departure from the European Union next year has weighed on UK shares. However, McKenzie believes that Brexit fears may prove to be overdone. ‘Whilst investors seem to have taken a clear negative view on Brexit outcomes, these are by no means certain at this stage and the recovery of sterling in the past year suggests that currency markets are more sanguine,’ the fund manager added.
http://citywire.co.uk/money/yield-appea ... 2/a1114717
This from today's Telegraph, excerpt:
'British shares have only been cheaper in the world wars'
'The only times British shares have been cheaper than they are now was during the two world wars, as global investors have withdrawn from the UK in droves, according to new analysis. The unpopularity of British shares has driven prices down and dividend yields up. The FTSE All Share index has gone nowhere this year and now yields close to 4pc. The gap between the dividend yield from the FTSE All Share and the yield available from 10-year government bonds (gilts) – known as the “yield gap” – is a popular valuation metric. A small gap or negative figure (when gilts yield more than shares) may indicate that the stock market is overvalued, as investors are not being adequately compensated with dividends for the additional risk they are taking by investing in shares. '
Re-checking the above yields:
Taking the recent yield on the FTSE-100 [google: FTSE Russell FTSE 100 Factsheet], the latest version dd 30/4/18 gives a div yield of 3.91%.
The UK 10 year Gilt is @ 1.44% https://www.marketwatch.com/investing/b ... trycode=bx
Ie. the yield gap this week is around 2.47%
I looked at the FTSE100 rather than the FT All Share, as most of my portfolio is invested in the former. The main reason the current gap interests me is that I'm approaching early retirement and 'traditionally' it would be around this time that I would look to begin de-risking my portfolio by for example progressively reducing exposure to shares, and shifting assets into bonds. For example that is the rationale behind the likes of the 'Vanguard LifeStrategy funds', and was similarly mirrored as a core tenet of thinking/advice in asset allocation from back when I worked in private client banking in the 90s. It's ironic that having kept the idea of this future required re-allocation in mind, now that I'm approaching that kind of stage it seems this might be almost precisely the wrong time to begin it. At first glance the likes of Vanguard appear to apply the approach in a rather mechanistic way vs age, without consideration of the relative valuations as highlighted by the yield gap. (If that's so perhaps the progressive reallocation strategy spanning say 20+ years means they assume point-in-time gap considerations as transient.)
Just thinking aloud as I went on there
The two things that seem reasonably clear though are that in global terms the FTSE is relatively undervalued, and, that this might be just about the worst time since WW2 to be re-allocating from stocks into bonds.And if your retirement portfolio were restricted to just stocks and bonds, keeping a weather-eye in future on when the yield gap is historically narrow could be used as a cue for stock>bond reallocation. DAK is there is an instrument that mirrors the UK gap? Or do you just take the 10yr Gilt yield and chart if vs the yield of the UK stock index of your applicable choice?
