Legendary long term value investor, Warren Buffet announced he is increasing his holding in a big oil company. Investors should Listen. This follows another drop in crude oil, which has now hit $29 a barrel (-5.7% on Friday) as sanctions on Iran were lifted, which will allow it to boost oil exports.
As mentioned previously we urge investors to remain calm as we see the current sell-off as more of a buying opportunity, and take solace in the fact that prominent investors are indicating that they see value and markets are oversold.
Below we look at positive factors investors should consider amidst all the negativity in the press. We also discuss how the dividend yield on the US stock market is once again higher than interest rates on bonds, which indicates to us that equity markets are cheaply valued.
Corporate Earnings & Economic Data
Investor focus will now shift to corporate earnings announcements and while it is very early to make a judgement on earnings, it has not been a bad start. Earnings will be critical to give stock markets direction, in our view. At the same time, while the media has focussed on arguable weakness in US economic data, key data, especially around the labour market continues to be very strong, and we believe the US economy remains in good shape.
Sentiment Extremely Negative
The worst time to sell is when everyone in the market is when everyone else is selling. We continue to believe investor sentiment is overly negative, and urge our members not to panic in the current market volatility. As an example of extreme negativity, the Royal Bank of Scotland issues a note telling investors to “sell everything”, which maybe a sign we are close to market capitulation and towards the end of the sell-off. The mere fact that the Royal Bank of Scotland is telling you to sell everything without even considering its valuation or long term fundamentals suggest that they are scare mongering and panicking investors.
Dividend Yields Indicate Long Term Value
Long term investors often compare the equity market dividend yield (a ratio that indicates how much a companies will pay in dividends each year relative to its share price) against the current bond yield (return from holding a bond). By comparing the two yields, it gives a relative measure of which asset class offers ‘better’ value when investing. All else held equal, investors will typically be attracted to the asset class which offers the better or higher yield as it is the predicted income yield they are likely to achieve over the coming year.
Long-term investors are getting a rare signal suggesting that now might be a great time to buy stocks. The worst start to a year in US equities history, now means that equities are at the most attractive level versus bonds in sometime. For just the fourth time in over 50 years, the US market (measured by the S&P 500 index) dividend yield moved below the yield on the 10-year US Treasury bond. The GFC in 2008, followed closely by a downgrade of the U.S.’s credit rating in 2011 were the last two times the 10-year Treasury yields were above the S&P 500 dividend yield. It’s difficult to argue that the current market rout is worse than these two situations.
Although equity investors may have to whether some short term price volatility, over the longer run history tells us they will be rewarded. The table below compares the outcomes of equity market returns once the bond yield is below that of the market dividend yield. As we can see, one year returns have all been in excess of 25% for investors who took the opportunity to buy when valuations were attractive. believe that over the medium to long term, investors will be reward for taking opportunities now.
Chart of the Moment
A dividend stock that holds in its current portfolio is Telstra. Telstra currently offers a 6% dividend yield, which is more than 3% above the current Australian 10 year bond rate (2.69%). Although we do not condone simply buying stocks on yield alone, Telstra is the dominant player in the Telco industry. The company is investing significantly into growth areas/acquisitions, including offshore projects to maintain its dominant position. Combined with a number for other factors, sees Telstra as a solid portfolio holding.
In summary
- Prominent investors are indicating that they see value and markets are oversold- You should listen
- Investor focus will now shift to corporate earnings announcements – It has not been a bad start
- The worst time to sell is when everyone in the market is when everyone else is selling
- Long-term investors are getting a rare signal suggesting that now might be a great time to buy stocks – Dividend Yield vs Bond Yield