There's value to be had

By Mark Dampier | 06 Oct, 2008 

I have to say that despite the news I think stock markets have held up relatively well. Even today when the FTSE fell around 8%, which was hardly much fun, compared to October 19th 1987 when the market fell 22% I thought the fall was quite modest, at least by those standards. The financial crisis is far from over and we have to expect the market to remain volatile. 
 
However despite the awful economic backdrop the stock market in the UK between 4000 and 5000 on the FTSE 100 does start to show some really quite good value. At around 4800 the yield on the index (even accounting for banks’ problems) is around or in fact higher than a ten year gilt, traditionally a good buying sign. Dropping down to below 4500 we start to see the yield on the index look better than cash. Remember too that interest rates in the UK are likely to fall, I believe they could even go as far as to half, over the next twelve months so cash rates are bound to start to become less attractive. However, unlike cash, the value of an investment is not guaranteed and will fall in value as well as rise.
 
Yields available now on UK equity income funds vary between 4% and 6% net. I have talked to a number of top income fund managers, who believe that they can at the very least hold that dividend or indeed increase it in line with inflation, although this is not guaranteed.
 
September and October are notoriously awful months in the stock market and this year is proving no exception. Towards the end of October, traditionally, markets often perk up a little.  Perhaps I am being too optimistic but with such pessimism around and cash levels both privately and institutionally at very high levels I think it would only take a tiny bit of good news to see a sharp rebound, although as I mentioned earlier we are not at the end of the current financial crisis. I do maintain my view that gradual buying on the poor days will pay dividends in the future. Emerging markets also look incredibly oversold to me bearing in mind they are not suffering the same credit problems. I will return to these soon.