Over the recent economic cycle, the acceleration in Global equities Returns was driven by three catalysts including (1) growth in corporate Earnings (2) a downward trend in interest rates (with bond yields reaching all time lows and indeed dipping into negative territory) and (3) massive liquidity injected into the financial system by Central Banks. (Notably, this resulted in their balance sheets being expanded from $4 trillion to $22 trillion since before the Great Financial Crash). And “Voila”, we are where we are today with market valuations.
Looking across Global Markets, we see divergence in the returns since 2014 when the US (in blue) is included & excluded (in orange). (EAFE: Europe, Australasia, Far East)
NET RETURNS (Euro priced) FROM DEVELOPED MARKETS WORLD (incl US) AND EUROPE AUSTRALASIA AND FAR EAST WORLD (EAFE) (ex US) (Source: MSCI)
Taking a closer look at the US markets, we observe today that the Cyclically Adjusted Price Earnings Ratio CAPE for US Equities (shown below) is about 30.6 times earnings compared to its 20 year average of 25.6 and its all time PE average of 17.1. Similarly, the Buffet Indicator (Market Cap to GDP) currently stands at 176.6%. To put that into context “fair” value falls in the range of 93% to 114%.
RATIO OF CURRENT US500 LEVELS TO 10 YEAR AVERAGE PE RATIO ADJUSTED TO INFLATION (CAPE) (Source: Shiller RS)
Though US valuations usually tend to be higher than other global regions, it is reasonable however, to attribute this (over) growth in US market valuations (by in large) to the technology sector. While overheated valuations within sectors are not unusual, it appears that the US growth stocks are particularly affected by over exuberant market participation leading to often eyewatering valuations. Indeed, one could argue that we are in a period of irrational exuberance within this sector when we see stocks like Tesla inc (TSLA) trading at Price/Sales = 13.8x, Price/Book Value = 35.2x, Price/Earnings = 224, and EV/Operating cash = 101.3x.
So, the CAPE, Buffet indicators (& others) suggest that US equities are indeed overvalued implying likely lower returns in the long term.
Casting our “Valuation” eyes around the globe however, we see a different picture. In Europe, Australasia, the Far East and Emerging Markets, valuations (and hence long-term returns) do appear more attractive. As the chart below shows, current Price to Earnings (PE) and Future Price to Earnings ratios (fPE) are lower than those for the US.
CURRENT (in blue) AND FORWARD (in orange) PRICE TO EARNINGS RATIOS FOR GLOBAL EQUITIES (Source: MSCI)
As investors really favoured “Growth” over “Value” factors for the past 5 years, we are now seeing attractive entry points across the European, Australasia, Far East and in particular, Emerging Markets. An opportune time then to consider adding a list of some of the worlds great and innovative companies to your portfolios from these regions?
Perhaps, but as always, we need to add further consideration and perspective to the analysis. As we begin a cycle of more challenging corporate outlooks and continued low interest rates, global earnings too, will be challenged and we shouldn’t be surprised if overall future returns are lower than the last decade. Indeed, within sectors, we shouldn’t be surprised where we also see swift reversal of fortunes of stocks which are currently in favour.
So how does all this distill into your long-term Financial Plan? From a practical viewpoint, if your plan contains long-term financial objectives, having a solid core of funds invested in Global Equities in your portfolio provides a decent foundation for long-term returns. Being Globally invested, your investment will already be positioned to take advantage when investor sentiment shifts to more attractive valuations within markets and across regions.
At Lifetime Financial Planning, our core beliefs continue to be…..that portfolio diversification, time in the market, not timing, passive investments and a long-term horizon all lead to decent and consistent capital returns in portfolios. We just have to remain disciplined (some would say boring), accept the short-term volatility and ignore the “noise”.
Michael Wall CFP® PhD is a Director of Lifetime Financial Planning. Aidan Wall Financial Services Ltd Trading as Lifetime Financial Planning is regulated by the Central Bank of Ireland. All views and details contained within this article are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.
Lifetime Financial Planning Remains Open During Lockdown
/in Financial Planning, Investment, Pension, Retirement /by Aidan WallWe at Lifetime Financial Planning wish to reassure our Clients that we are included in the Government’s list of Essential Services. So we are continuing to work as normal through the lockdown. We have however switched to conducting many Client meetings online, and our Clients are finding this very convenient and safe also in these Covid times.
So stay safe everyone and we will all get through this.
Aidan Wall QFA FLIA SIA RPA
The Short and Long Term View
/in Financial Plan, Financial Planning, Investment, Investment Fund, Lump Sum Investment, Retirement /by Michael WallOver the recent economic cycle, the acceleration in Global equities Returns was driven by three catalysts including (1) growth in corporate Earnings (2) a downward trend in interest rates (with bond yields reaching all time lows and indeed dipping into negative territory) and (3) massive liquidity injected into the financial system by Central Banks. (Notably, this resulted in their balance sheets being expanded from $4 trillion to $22 trillion since before the Great Financial Crash). And “Voila”, we are where we are today with market valuations.
Looking across Global Markets, we see divergence in the returns since 2014 when the US (in blue) is included & excluded (in orange). (EAFE: Europe, Australasia, Far East)
NET RETURNS (Euro priced) FROM DEVELOPED MARKETS WORLD (incl US) AND EUROPE AUSTRALASIA AND FAR EAST WORLD (EAFE) (ex US) (Source: MSCI)
Taking a closer look at the US markets, we observe today that the Cyclically Adjusted Price Earnings Ratio CAPE for US Equities (shown below) is about 30.6 times earnings compared to its 20 year average of 25.6 and its all time PE average of 17.1. Similarly, the Buffet Indicator (Market Cap to GDP) currently stands at 176.6%. To put that into context “fair” value falls in the range of 93% to 114%.
RATIO OF CURRENT US500 LEVELS TO 10 YEAR AVERAGE PE RATIO ADJUSTED TO INFLATION (CAPE) (Source: Shiller RS)
Though US valuations usually tend to be higher than other global regions, it is reasonable however, to attribute this (over) growth in US market valuations (by in large) to the technology sector. While overheated valuations within sectors are not unusual, it appears that the US growth stocks are particularly affected by over exuberant market participation leading to often eyewatering valuations. Indeed, one could argue that we are in a period of irrational exuberance within this sector when we see stocks like Tesla inc (TSLA) trading at Price/Sales = 13.8x, Price/Book Value = 35.2x, Price/Earnings = 224, and EV/Operating cash = 101.3x.
So, the CAPE, Buffet indicators (& others) suggest that US equities are indeed overvalued implying likely lower returns in the long term.
Casting our “Valuation” eyes around the globe however, we see a different picture. In Europe, Australasia, the Far East and Emerging Markets, valuations (and hence long-term returns) do appear more attractive. As the chart below shows, current Price to Earnings (PE) and Future Price to Earnings ratios (fPE) are lower than those for the US.
CURRENT (in blue) AND FORWARD (in orange) PRICE TO EARNINGS RATIOS FOR GLOBAL EQUITIES (Source: MSCI)
As investors really favoured “Growth” over “Value” factors for the past 5 years, we are now seeing attractive entry points across the European, Australasia, Far East and in particular, Emerging Markets. An opportune time then to consider adding a list of some of the worlds great and innovative companies to your portfolios from these regions?
Perhaps, but as always, we need to add further consideration and perspective to the analysis. As we begin a cycle of more challenging corporate outlooks and continued low interest rates, global earnings too, will be challenged and we shouldn’t be surprised if overall future returns are lower than the last decade. Indeed, within sectors, we shouldn’t be surprised where we also see swift reversal of fortunes of stocks which are currently in favour.
So how does all this distill into your long-term Financial Plan? From a practical viewpoint, if your plan contains long-term financial objectives, having a solid core of funds invested in Global Equities in your portfolio provides a decent foundation for long-term returns. Being Globally invested, your investment will already be positioned to take advantage when investor sentiment shifts to more attractive valuations within markets and across regions.
At Lifetime Financial Planning, our core beliefs continue to be…..that portfolio diversification, time in the market, not timing, passive investments and a long-term horizon all lead to decent and consistent capital returns in portfolios. We just have to remain disciplined (some would say boring), accept the short-term volatility and ignore the “noise”.
Michael Wall CFP® PhD is a Director of Lifetime Financial Planning. Aidan Wall Financial Services Ltd Trading as Lifetime Financial Planning is regulated by the Central Bank of Ireland. All views and details contained within this article are for information purposes only, are subject to change & are not advice. We recommend you seek independent clarification for your particular circumstances. Lifetime Financial Planning makes no representations as to the accuracy, completeness nor suitability of any of the information contained within and will not be held liable for any errors, omissions or any losses arising from its use.
Business Owners, Diversify your Assets and “Protect thy Purse”
/in Uncategorized /by Michael WallIf you are a business owner or a practice partner, then, equity in your business will probably form a major part of your retirement strategy.
But ask yourself today; What is my exit plan?
How do I transfer wealth created by my business into my back pocket? And, how much will my business be worth to me when I decide to retire?
What happens to my retirement income if external factors beyond my control devalue my business? COVID-19 for example.
Exiting your business needs to be planned and carefully managed. Remember, the tax implications of not planning this well in advance can be severe.
Our advice is to use the business to build additional assets external to & independent from the business.
The charts show that in doing so, you diversify your personal assets and reduce the risk of relying 100% on your business to provide enough retirement income in later years.
Visit us at www.lifetimefinancial.ie or https://www.fpsb.ie/find-a-cfp/name/michael-wall/ for more information
Stick to the Plan – Time in the Markets!
/in Financial Plan, Financial Planning /by Michael WallJust a brief note to share a thought on the recent market activities. As a long-term investor in equities, I remind myself regularly that I am buying a small stake in the world’s most innovative companies. These global businesses are the service, travel & leisure providers, drivers of technology and manufacturing advancements, medicine discoverers, communication enablers, food producers, green energy innovators, etc. who shape the world as we know it today.
If you are fully invested, then it is worth noting that you already own that stake and if you SELL now, you are gifting somebody else a potential bargain.
Remember, SELLING equities in a temporary decline in markets could lead to a permanent loss to your portfolio and a bargain to someone else, which is not rational.
Experience from a decade ago teaches us that these world innovators will adapt, will revamp their business, will tool up and will face the new business environment in a post Coronavirus era. This may involve new ground being broken, a change in business and work practice or new products and services.
So, during these temporary declines in valuations, it is important to remain rational and recall that it is “diversity & time in the market, not market timing” which leads to better investment returns over the long term. This is exemplified by the S&P500 index of North America’s biggest 500 companies (above)
If you have any queries or concerns about current market conditions, please do give me a call on 085 866 9813.
Please do stay safe & check in on those who are cocooned.
Michael
Is the Stock Market Downturn Any Cause for Concern?
/in Financial Planning /by Michael WallIn any given year, even in good years, the World Stock market will be minus an average of 15% at some point during the year.
Every seven or eight years the market will be down two or three times that, minus 30% to 50%. Right now we are going through one of those major downturns. Is this a cause for concern ? the answer is no, we have been here many times before.
In the past forty years for example there have been six major downturns in 1981, 1987, 1990, 1998, 2002, and 2008. At times like these the benefit of having a Lifetime Financial Plan becomes clear, because it allows you to see the big picture. Give us a call if you want to discuss any financial planning matter.
International Women’s Day Sunday 8th March
/in Financial Plan, Pension, Retirement /by Aidan WallThere are plenty of national and international studies showing lower participation rates for women contributing to a pension and for those women who do participate, smaller pension pots.
The reasons and impact of the resulting pensions pay gap for women are manifold. Here are 7 simple step’s which women, and their employers, can take to help narrow the pension pay gap women experience.
If you would like to take control of your finances and get your Lifetime Financial Plan in place then please contact Aidan Wall, QFA, or Michael Wall, QFA, at 046 924 0961.
Investment Snippets #6
/in Financial Broker, Financial Plan, How to invest a lump sum, Investment, Investment Fund, Lump Sum Investment /by Aidan Wall#STICKTOTHEPLAN: How to deal with Market Volatility
Volatile Markets rattle the nerves of investors, but we should remind ourselves why, as investors, we invest.
Consider that when we purchase shares in a company, we are buying ownership of that company, so we become a shareholder and that entitles us to a share in the profits. The profits may be distributed in the form of a dividend or invested back into the company. The upshot is when a company is profitable; it usually increases its net asset value.
However, the profitability of a company is not always reflected in the share price and visa-versa, Price doesn’t always reflect profitability. This is highlighted in the chart which shows Unilever PLC’s share price and the company’s profitability which we measure using Earnings per Share. Here, we see even with consistent increasing earnings there is significant “volatility” in the share price.
The share price is what most people are familiar with and it can be difficult to tease out the cause of its volatility. Genuine reduction in profits due to changeable local economic factors, interest rate policy, bond yields and inflation, employment, political interference, and world trade agreements all influence investors emotions to varying degrees and therefore their appetite for investment which is reflected in the share price. A hard look at the facts is always warranted when we see volatility to understand that the investment case remains sound.
If you are a lump sum investor, then downward volatility has to be ridden out. Strong emotions will tempt you to SELL holdings and preserve the CASH. This is a mistake as it will likely crystallize a permanent loss, which if repeated frequently, is the quickest way to destruction of your wealth. Consider also, that you will likely be selling a good value asset at low price which is a bargain for a buyer on the other side.
On the other hand, we view Share price volatility as an opportunity to pick up quality assets at good value. If you are a regular investor, a monthly contribution invested will allow you to take advantage of a lower price paid for your holdings which can help to enhance long term capital appreciation.
And so back to Unilever, which if you had acquired in 31/10/2013 at a price of £25.01 per share, then today, 5 years later, that share is trading at £40.85, which represents a gain of £15.84 (63% or a compound growth rate of 10.31% pa).
How do we deal with market volatility?…….we ALWAYS look at a 5 year investment term.
If you have any queries, reservations, concerns or just want to talk it out, do give us a ring on 085 866 9813
Investment Snips #5
/in How to invest a lump sum /by Aidan WallThe Yield Titans….
As investors, we look to place our investment where we hope to receive an income (a yield) or a capital appreciation or both on the initial investment, over a period of time. In recent times however, the fixed income asset “tool box” would likely not have contained long dated sovereign bonds. The reason for this is that yields from these bonds were at historically low levels (See the US Treasury 10 Year Bond Yield in the chart below).
That means if you deposit your hard earned money in the bank, the interest rate and the capital will be eroded by inflation. If you purchase a US 10 Year treasury bond, you will receive a net (Real) yield on your investment of 0.5% better than had you placed the cash on the markets which you can expect to receive a net yield of 0.4% ignoring capital appreciation. These returns are before costs of trading are incorporated.
Why is this important? Well, US equities exemplified by the Dow index have been trading bullishly since March 2009 resulting in year on year record breaking market valuations being achieved. At the end of 2017, the combined market capitalisation of the Dow Jones Industrial Average (DJI) was an eye watering $6,873,564.2M. In 2018 already, the DJI has jumped in value by 4.3% adding an additional $295,563M to the valuations contained within bringing to adjusted total combined market value of companies contained on the index to $7,170,139M. To put this into context, the total market capitalisation of the DJI at the end of 2009 was ca. $3,499,645M.
These astronomical valuations reflect the sentiment of investors who sought their yields from equities when bond yields were falling and deposits were erosive and which, in an improving corporate and economic climate made perfect sense. As a result, it leads many professional investors to view these markets as overvalued when compared to their long term averages and likely to proceed with caution.
So, with the US Treasury 10 year bond yield, edging closer towards the desirable 3%, might we soon see a movement in investor’s monies from equities and a correction in this long running bull equities market? At Lifetime Financial Planning, we pay close attention to such subtleties.
If you would like to hear more about how we manage these difficult investment environments please feel free to contact us via the website.
A Little Care and Attention Can Save on Tax
/in Financial Plan, Financial Planning, Investment, Lump Sum Investment /by Aidan WallMany people own shares in publicly listed companies such as Aviva, Glanbia, Ryanair, Kerry, Vodafone etc, but few are aware that a little care and attention in managing these can save you a considerable amount of money in tax.
For Personal Financial Planning advice, talk to Michael or Aidan, at Lifetime Financial Planning today. Visit us at www.lifetimefinancial.ie then call us on 046 9240961. Lifetime Financial Planning; with you every step of the way.
Stand Back from the Scrum Snips #5
/in Estate Planning, Financial Broker, Financial Planning, How to invest a lump sum, Investment, Investment Fund, Lump Sum Investment, Stocks and Shares /by Aidan WallIts happening again, Stock markets are at all-time highs and confidence is flying high. But at Lifetime Financial Planning we use our tried and tested Value Based Investment Strategy to identify good value for our Clients. And from the 600 largest companies in the US and UK, only 12 meet our value criteria currently, which means 98% are not good value. However, the good news is we are likely to see a lot of Volatility in 2017, and volatility always means good value buying opportunities for our Clients.
Talk to us if you would like your Pensions and Investments to be managed in a strategy with a long (20 year) successful track record, and with a focus on value for money assets.
As always, bear in mind that Investments fall as well as rise, and past performance is not a good guide to future performance.
Moved to Ireland from the UK? – Transfer Your UK Pension
/in Estate Planning, Financial Broker, Financial Plan, Pension, Personal Finance, Retirement /by Aidan WallIf you worked in the UK and have moved to Ireland, you may have left one or more UK Pensions behind. We strongly recommend that these assets be transferred back to Ireland, you thereby gain control of your asset.
At Lifetime Financial Planning, we have the technical expertise and experience in transferring UK Pension Funds to Ireland.
If you need help in relation to transferring your UK pension or any other financial matter give us a call at Lifetime Financial Planning.
Tel +353 (0)46 924 0961. Email: michael@lifetimefinancial.ie or aidan@lifetimefinancial.ie
Reminder to Submit Your Pension Contribution Before the Pay and File Deadline
/in How to invest a lump sum, Investment, Investment Fund, Personal Finance, Savings Plan, Tax, Tax Saving Tips, Uncategorized /by Aidan WallWe’re just writing to remind you to take full advantage of the generous tax relief available on your 2015 pension contribution before the pay and file deadline of 31st October, or 10th November if you file through Revenue Online Service (ROS).
Depending on your age and income, you may be eligible for up to 40% tax relief on your personal pension contribution for 2015
* Revenue rules, age and income related rules apply.
To take full advantage of this generous tax relief, review your existing pension funds and start your Lifetime Financial Plan please call us at 046 9240961 or visit our website at www.lifetimefinancial.ie
We look forward to hearing from you.
Aidan Wall
Aidan Wall is a Qualified Financial Advisor, a Fellow of the Life Insurance Association and a Senior Investment Advisor.
Aidan has been providing impartial financial advice to clients since 1983, and he has acquired vast experience in the areas of Financial Planning, Family Income Protection, Retirement Income and Investments.
E: aidan@lifetimefinancial.ie
Dr Michael Wall
Dr Michael Wall, PhD, is an Authorised Product Advisor (APA).
As an Authorised Product Advisor (APA) Michael is working under the mentorship of Senior Financial Advisor, Aidan Wall and has completed his QFA (Qualified Financial Advisor) examinations.
E: michael@lifetimefinancial.ie