After a number of good years for global equities, recent market swings have caused financial anxiety for many investors. Although periods of short term volatility should be expected when investing in equities, the protracted period of relatively “smooth” returns has heightened investors’ sensitivity towards short term market declines. Marriott is of the view that equity investors who are able to ride out the volatility by maintaining a long term perspective will be rewarded with returns well ahead of cash and bonds in the years ahead due to the following:
Dividend yields in line with historic averages
In his 1989 letter to Berkshire Hathaway investors, Warren Buffett famously stated that he “would rather buy a wonderful company at a fair price than a fair company at a wonderful price”. Marriott only invests in high quality dividend paying companies -the chart below highlights that current dividend yields, for the companies we hold, are not far off levels considered to be fair from a historic perspective:
Below average inflation
For almost two decades, inflation has remained in the region of 2% due to the benefits of globalization and the impact of technology. Looking ahead, technology is likely to continue to keep inflation in check when contemplating its impact on wages (via automation), competition (via ecommerce) and production (via Artificial Intelligence and Data Analytics). Inflation erodes returns, thus below average inflation suggest better, real returns (returns over and above inflation) from equities over the longer term.
Below average interest rates
Whilst US interest rates are expected to rise in 2018, cash and bond yields are likely to be lower than they have averaged in the past due to lower inflation and the current over indebtedness of the global economy. According to the Institute of Institutional Finance, global debt levels rose to a record high of $233 trillion dollars in the 3rd quarter of 2017. The global ratio of debt-to-GDP is above 300%. This huge debt burden will likely limit the extent interest rates can rise in the years ahead as too many hikes would trigger a recession. Lower cash and bond yields increase the relative attractiveness of equities.
A robust growth outlook
The IMF forecasts that every major economy will grow in 2018. India is expected to be the fastest growing big economy, with China not far behind. Importantly the world’s biggest economy – the US – is also in good shape: business confidence is high; jobs are plentiful; wages are growing; and tax cuts are poised to stimulate the economy further. Even Europe, with all its previous headaches, is expected to grow at a rate close to 2%. A healthy global economy provides an ideal platform for robust dividend growth, the biggest driver of capital growth over the long term. As such, we expect dividend growth in the region of 5 – 7% from our chosen global equities.
Despite current market volatility Marriott is of the view global equities should remain investors’ asset class of choice considering the observations and trends discussed above.
Although market volatility will likely be higher in the years ahead, the potential gains on offer form the world best dividend paying companies suggest it will be worth it.