If you’re going to invest in equities in 2013, you are bound to feel a strange sensation. Kind of like you’re sitting on one of those pilates balls while it is being inflated. On the one hand, you and your portfolio are enjoying a pleasant and uplifting ride . On the other hand, you feel a little unbalanced and uneasy. It’s all a bit surreal.
Blame the guy bent over behind you, huffing, puffing and quantitatively easing furiously as he blows up the ball. Beige suit, bald head. Why, it’s none other than Ben Bernanke, outgoing chairman of the US Federal Reserve and fair-weather friend to shareholders everywhere.
It’s a weird image for weird times. When even dyed-in-the wool fixed income guys are buying equities for their personal portfolios, as former PIMCO boss Kumar Palghat just told me he was doing, you know that the “fix” is in for equities to do well for years to come.
The problem is, Palghat invests money for a living and you don’t. He’s good at riding a pilates ball until it’s fit to burst and will happily roll off a few seconds before the thing explodes, while you’ll be left with a stung bottom, hurtling towards the floor.
If you don’t want this to be you, some careful calculations are required.
If you’re in catch-up mode with your superannuation, the returns on the sharemarket are likely to look good for at least a couple more years, as Bernanke keeps his mouth to the nozzle.
Yet the professional equity guys are nervous. Simply buying shares on a “simplistic dividend/income yield basis” is asking for trouble, the head of Australian equities at Schroder Investment Management, Martin Conlon, says.
“The determinant of long-run return is far more likely to be whether you lose a substantial portion of capital, rather than a 0.5 per cent differential in the running yield,” he says.
In other words, there will be plenty of companies that won’t survive this latest cheap corporate debt bubble, which is happening alongside a household sector that is still de-leveraging.
“Our concern is that a banking sector pressured and keen to open the purse strings, aligned with a corporate sector without organic growth opportunities, may succumb to the temptation of growing inorganically by purchasing existing assets at increasing prices,” Conlon says.
So boring and sustainable cash flows make good investments for 2013. Time to get off the ball, so to speak.