06/12/2011
By Ilonka Oudenampsen
Stock market valuations, and those of the companies that contribute to them have become too depressed, and investors should look beyond the headlines on the Eurozone crisis, Duncan Lawrie Private Bank said.
The company said that, despite all the bad news, corporate balance sheets have remained strong following the extensive restructuring many companies have undergone since 2008.
Edward Bland, head of research at Duncan Lawrie, said: “Corporate cash balances are at record levels which bodes well for future growth. Many blue chip companies were quick to acknowledge that banks would not be a reliable source of funding for an extended period and acted accordingly by building up cash reserves. This puts them in a position of strength to increase shareholder returns, for example, through timely and profitable capital investment or by consolidating market share through corporate activity. Alternatively, companies can buy in their own shares or pay out more of their cash balances in the form of dividend income.”
He added that equity markets and their constituents generally look attractive and are attractive to investors “willing to accept the roller-coaster ride that looks set to continue into next year”.
Duncan Lawrie believes that, in the current uncertain environment, the right approach is to focus on relatively secure income as this will represent the larger element of returns available from equity investments. Over the past 10 years the return from the FTSE 100 from reinvested income has exceeded the return from capital growth by over 50 per cent, the private bank said.
Bland added: “The best-performing assets this year have been those offering solid income which also exhibit lower sensitivity to broader market moves. Widespread risk aversion has left the traditional safe havens, such as corporate bonds and gilts, expensive and illiquid.”
Emerging markets, especially China and India, are following a more traditional economic cycle, Duncan Lawrie noted, and some equities with exposure to these markets have been subdued due to the implementation of monetary tightening to bring down inflation.
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