Newspaper article The Journal (Newcastle, England)

This Could Be the Year for Investors as Interest Rates Settle; SHARE WATCH

Newspaper article The Journal (Newcastle, England)

This Could Be the Year for Investors as Interest Rates Settle; SHARE WATCH

Article excerpt

Byline: Andrew Miller

THE opportunity set for investors waxes and wanes over time.

This opportunity set is largely a function of how widely the performance of various asset classes, sub asset classes and single line securities differ. A recent reversal in post-crisis trends towards ever narrower earnings dispersion has coincided with a more fruitful period for active managers.

The difference in returns available from the worst and the best performing stock in the S&P 500 by mid-2014 was narrower than seen in at least three decades. Corporate sales, forecast earnings and valuations all display similar trends. The stock market became increasingly uniform as the economic cycle trundled unevenly forward. There are a number of potential explanations for this convergence. First, even by the middle of 2014, the economic cycle was of around the average age for post-war expansions. Intuitively it makes sense that the longer an economic expansion lasts, the more corporate revenues from all sectors are sucked towards the baseline of US GDP growth, with the US economy still by some distance the dominant capitalist economy. Meanwhile, those sectors with more revenues derived from outside of the US may increasingly provide a less distinctive edge as previously meteoric emerging markets growth continues to moderate.

Up to a point, the story of the ageing cycle may have helped drive this convergence further down the profit and loss statement too.

Previous spikes in earnings divergence owed much to significant write-downs in certain sectors in the wake of various bursting bubbles down the years. Financials were obviously the most severely affected in the most recent crisis, while the aftermath of the TMT bubble saw Technology, Media and Telecommunications companies suffering similarly dramatic write-downs. With many of the major write-downs (and write-backs) from the great financial crisis now in our rear view mirror, there has been less scope for significant distinction between sectors.

A final point is the fact that real interest rates now sit at the lowest level seen in contemporary economic history. …

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