Bubble warning: Five indicators to watch out for
11 Aug 16
As the old strategy of “sell in May” has proved a failure thus far in 2016, Russ Mould, investment director at AJ Bell, looks at five indicators investors can use to judge whether there are further gains to be made or whether markets are entering bubble territory.
“In the end, the valuation paid for an asset is the ultimate arbiter of the investment returns made on it. Valuation metrics using forecast earnings can be unreliable, as those forecasts are often wrong, so dividend yield can offer more comfort. Management teams are reluctant to cut the shareholder payouts as this tends to hit a share price hard and potentially their own wallets. At the time of writing, the FTSE All-Share is yielding 3.45%, compared to a 10-year gilt yield of 0.68% – that’s a 277 basis point (2.77%) premium. The All-Share has only twice offered a premium yield of 2% or more since 2008 and on both occasions the stock market promptly made healthy gains.
This may be the ultimate effect of QE, to drive yield-starved investors toward equities whether they like it or not, but income-seekers must guard against buying dividend-paying stocks at any price, to avoid the danger of being swept up in a bubble that eventually bursts,” he said.
Tags: Investment Strategy
