January 2009 Market Update - Equity Markets

As I have already reported, shares had a dismal year in 2008. However, as I have also commented, many shares may have been sold off regardless of their real worth. It is difficult to predict with any accuracy where individual indices may end up by the end of 2009, but we are optimistic they will be higher than the end of 2008. Stock markets are always discounting forward, i.e. looking ahead, and they are probably already reflecting what will be poor results for many companies during the first half of 2009. What the majority of investors will be looking for is companies that are able to weather the poor credit markets and inevitable consumer slowdown. This means companies with low, or no debt, or those where demand for their products is not that economically sensitive. They will also be looking at companies who may benefit from increased government spending on infrastructure. Most importantly we believe that investors will be looking for companies that are paying real and sustainable dividends rather than speculating on those company’s shares where gains are dependent on whether the share prices increase. This is particularly important given the low returns now available from cash. The current dividend yield on the FTSE All Share index is 7.4% (source: Digital Look). Bear in mind that this yield is historic, i.e. based on dividends previously paid out by companies included in the All Share. Given the current economic environment it is highly likely that these companies will reduce their payments on average in the future. However, if one assumes that these will be half the current level, which is fairly pessimistic, then a dividend yield of 3.7% is still more attractive than the near zero rates available from cash, especially if one assumes a cut in the UK base rate. It is likely that these lower interest rates will be with us for some time. Thus the demand for higher yielding shares of companies who can merely retain their current dividend will be high. It is likely that a lot of these companies will be overseas ones, as the UK market is skewed towards banking and financial stocks, whose profits are most under pressure. We are therefore particularly optimistic about the prospects for the Marlborough Global Income Fund, which forms a significant part of the majority of client portfolios.