Evercore Pan Asset

One of the things we look at closely is the income any given asset yields. It is part of our ”Keeping it Simple“ approach.

For years clever investors have told their clients to look at total returns. If you are a charity or pension fund not paying tax you do not mind whether the gain comes as dividend or capital appreciation. If you are a high tax rate investor you prefer capital gain to dividend or interest income. This is all true.

It also contains some dangers. Whilst it is true that buying a low-yielding share or market can make you good money on the capital gain, that is only likely to occur if the underlying company or economy is growing rapidly and just happens to be reinvesting more of the money and distributing less. It is not true if the economy or share combines low yield with poor growth. Then you are likely to do badly as a result. If the yield is low because that is all they can afford, beware.

It is important to remember that the reason for buying company shares or properties is the income they yield, and the growth in that income. Investors for years have been prepared to accept a lower income on a share or even on a property than on a bond, because they expect the income to go up over time. That in turn is likely to result in appreciation of the capital value. The reason you seek rising asset values of companies is that reflects and helps create rising income paying power.

One of the reasons shares fell so sharply in 2008 was the sudden realisation that dividends could go down as well as up. Property values fell, as people remembered that rents could stop rising, and space could be difficult to let at all. In the UK one quarter of all the dividend income in 2007 came from bank shares. There was bound to be a big fall in total dividends in the market, given the financial distress of some of the leading banks.

Today stock markets are advancing strongly. It is time to ask how good is the underlying value at these levels? How much income can you enjoy? The surprising thing is how low yields now are, reflecting the dividend cuts alongside the share price improvements. Conversely, property yields and corporate bond yields are still much higher.

The US market is now yielding just 2.5% and global equities just 2.6%.  Bulls will say with cash at 0.5%, and with growth likely to resume next year, that is fair enough. Bears will counter that dividend growth may be slow from the bottom in the advanced countries, as their economies have to work through the debt overhang, and as their banks struggle to replenish their cash and capital reserves.

So how does their yield compare with other assets? You can buy shares in emerging markets and in Asia on similar yields to the US, but growth should be faster. That to us makes them the better bet.

You can still buy sterling corporate bonds of good quality on more than a 6% yield. That’s more than twice the yield on world equities, and seems anomalous. If the corporate outlook is as bad as the bond market still discounts, the outlook for shares will be far worse.

You can buy US property through the ETF of property shares on a 5.4% yield, and Asian property on a 4% yield. There are still troubles ahead in the rental markets in some centres, but a lot has now been written off or written down. The income levels have fallen substantially in the last year.

That implies to us the medium-term investor should do better in world property than in world shares. Rental income remains a prior claim to dividends. The company sector is unlikely to do well without requiring more commercial property and paying more rent.

Although it is early in the cycle, the pace of share appreciation suggests to us property is now the better choice than equity markets. 2.5% yields may look fine whilst interest rates remain near zero, but they do not look so exciting compared to other yields available on property and corporate bonds.