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Your Money > Investing Comment Articles > When will shares...
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By Richard Evans
"No one rings a bell at the bottom of a bear market," goes the old stock market adage. Well, someone did at the bottom of the last bear market - and the unusual conditions that prompted that call have recently recurred. So have we just seen the low point of the current turmoil, and is now the time to pile back into equities? The clever stock-watchers who got it right last time, in March 2003, reasoned that equities had become too cheap when they spotted that the income produced by investing in shares - the "yield" - had overtaken the returns from government bonds. Why is this unusual? Bonds pay a fixed rate of return and have relatively little scope for capital growth compared with shares. Those who buy shares, by contrast, expect the income to rise over the years (along with the share price itself) and can therefore be content with a lower initial return. So to buy shares and immediately get a better income than from bonds sounds like a great deal. Investors in 2003 agreed. They calculated that if shares had fallen far enough to push the yield so high, they had fallen too far and were clearly undervalued. The stock market started to rise, ushering in a bull market that ended only with the arrival of the credit crisis last year. The reason for this trip down memory lane is that the yield on shares recently rose again above the income from government bonds - for the first time since the March 2003 occasion. The yield on British shares is now about 5 per cent, exceeding the yield on 10-year government bonds of about 4.4 per cent. If history repeats itself, we should be in for another recovery. So is the "yield crossover" really a buying signal this time round? "The current level of dividend yield appears to be very attractive versus gilts but this is no guarantee that we have reached the market low," says Sam Morse, who manages Fidelity's MoneyBuilder Growth fund. Another analyst points out that current economic conditions are very different from those of early 2003. "We are facing a recession and a number of companies have recently indicated that their dividends will be reduced or axed altogether," says Keith Bowman of Hargreaves Lansdown, the stockbroker. And the Government's bail-out package for the banks is thought likely to mean that their dividends are reduced or cut altogether for some time. "This is different from last time," he adds. "In 2003 we weren't seeing the constraints on consumer spending we are now - the falls in the stock market back then were more to do with the impending war in Iraq than with economic problems." The argument for caution this time round is similar to the advice that investment experts normally give regarding individual shares that offer high yields: look beyond the headline figure and ask yourself whether the dividend can be maintained or is heading for a fall. Mr Morse also reminds investors that that in 1974 the market experienced many false rallies, followed by major lurches downward. "When the bounce did come in 1975, the market virtually doubled in a few months. I think we could be in the last phase of this bear market," he says. "My advice is to stay fully invested and reinvest your dividends." Reinvesting income allows you to benefit from falling share prices because the cash sum will buy more shares if prices are low, giving you more exposure when recovery comes. Mr Bowman has a similar stance. "I wouldn't be without exposure to shares at the moment," he says, "but I would leave room for further buying on more weakness." Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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