Aug 2010 Financial News

Equity returns may benefit from tough times

Aug 16, 2010

THE global investment climate has been in turmoil since the onset of the global financial crisis, and reports related to trading on exchanges and investing in other financial instruments have generally stated that things are tough and returns are minimal at best.

There has not been much good news where this type of activity is concerned; however, the argument is being made that the current economic situation could be beneficial to those paying close attention to equity returns.

In the second quarter report of the Global Value Fund managed by Fortress Fund Managers Limited, the point was made that while it is important to limit risks in the months ahead, it is also important to remember that difficult economic times are not necessarily bad for equity returns.

“The silver lining to lacklustre economic growth is that interest rates can stay low,” the report said. “This tends to held corporate profits and to support equity valuations directly.”
It was stated that one way in which this can be seen is via dividend yields, with the point being made that there are now dozens of high quality stocks around the world with dividend yields higher than the yield on 10-year US Government bonds.

As it relates to the Global Value Fund’s perormance over the April to June, 2010 period, the report stated that the Fund recorded a negative return of 0.8 per cent, which reduced the gain for the year thus far to 0.6 per cent, and that for the 12-month period prior to June 30th to 10.7 per cent.

After a good start to the year, global markets, within which the Global Value Fund operates, stumbled in May and June, erasing gains and putting world equities firmly in the red for the year.

The quarterly report stated that the drop came in response to a collapse in the value of Greek government debt, which traded as low as 60 cents on the dollar in early May.

“Bonds issued by Spain and Portugal also sold off substantially. The European Central Bank stopped the slide, at least temporarily, by forming a fund that will support the rollover of EU countries’ debt,” the report said. “One of it concerns was the health of the European banking system as a whole, still suffering from the global crisis of 2008, and now facing large potential writedowns on “risk-free” government bond holdings.”

It was argued that in the coming months, markets may recover some of their recent losses, but it was noted that the underlying difficulties will probably still linger and appear periodically.

“The economic environment could very well be uneven for quite some time, with movements among markets, sectors and stock possibly diverging widely from each other,” the report said. “These are fertile conditions for the kinds of value-based investment processes that make up the Fund.”


Source:
By Randy Howard
Barbados Advocate
Monday August 16, 2010

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