A Powerful Argument For Global Equity Income

I have felt for some time that one of the biggest current risks for investors is that they become so bemused by the gloomy news coming out of the United States that they will miss the strength of the potential recovery in US equities this year. There are several reasons why the two trends – gloomy economic news, positive corporate prospects – are even more than usually out of synch with each other. I am grateful to Guy Monson, the CIO of Sarasin, for providing more powerful evidence of this important divergence, which has big implications for investors.

The most important reason for the divergence is that even though both the consumer and the public sector remains mired in debt, the US corporate sector has come out of the credit crisis and recession in extraordinarily good shape. In fact, as Guy points out, well established companies, especially those with a global market presence, have rarely faced better conditions – minimal domestic inflation, a super-competitive dollar, strong balance sheets and falling unit labour costs.

In fact, while it is true that the banking system remains extraordinarily fragile, and domestic demand is constrained by high unemployment and personal debt issues, for those companies looking beyond domestic boundaries the world has never looked better.  The critical point is that while there is no doubt that economic leadership is shifting from the West to the emerging markets, led by China, this trend provides an exceptional business opportunity for competitive exporters with strong brands, global distribution and access to the fastest growing markets.


This happy state of affairs is already reflected in two highly visible trends – the rebound in corporate profits in the US, which is as sharp as the decline that preceded it and the recovery in the US trade balance, which has already been halved from its peak and is likely to continue that way, absent a further sudden shift in the value of the dollar. Meanwhile, measured against bonds (admittedly a narrow valuation measure), equities still look more favourably valued than at any time since the 1970s, despite the rebound we have seen from the lows in March 2009, according to Ned Davis Research.

For investors one of the most important implications is that the case for thinking we could be facing a rerun of the Nifty Fifty years of the 1960s, when large global companies led the global markets higher, looks well founded. Just as importantly, these conditions greatly increase the attractions of global equity income as a home for investable cash – whether you choose to access that emerging trend through a fund or directly through investments in individual corporate equities.

For UK investors in particular, this looks a much more attractive option than conventional UK Equity Income funds, which increasingly reflect the lopsided and highly concentrated nature of the UK stock market, with its dominance by just a few companies in 2-3 highly exposed sectors, principally energy and drugs companies.  Just five stocks now account for more than 40% of the total dividend payments of the FTSE All-Share index. The two largest oil majors, BP and Shell, account for 25% just on their own.

UK equity income funds are where the money is tending to flow as investor confidence slowly returns. Guy’s argument is while equity income in general is a sound place to be looking, the lopsided profile of the UK market is exposing investors in those funds to a degree of concentration risk with which, did they but understand it, they might well entitled to feel uncomfortable. According to Sarasin’s analysis, Glaxo and Vodafone between them make up more than 10% of the value of eight of the most popular UK equity income funds. All but one of them have more than 30% of their portfolios in just eight of the largest UK stocks.

As a firm that specialises in global thematic investing, it is no surprise to learn that Sarasin is currently pushing its global international equity income funds as an alternative. One needs to lay off for a degree of talking their own book. However self-interest does not mean that they cannot be right and the evidence in any event speaks for itself. (By way of disclosure I am sufficiently persuaded of the merits of the argument for switching to global equity income that I own units in one of Sarasin’s international income funds and have looked at those of other providers as well).


The key points to take away are not open to challenge. The UK stock market has always been more concentrated than most other leading markets, because of its dependence on banks, oil companies and pharmaceuticals. In the US the 10 largest companies account for less than half the proportion of the market that they do in the UK. The universe of potential dividend-paying stocks outside the UK is therefore both more diversified and less vulnerable to dividend cuts than its UK equivalent.

More importantly, whether or not you like the idea of the Nifty Fifty (the craze for which, it is worth pointing out, eventually ended in tears in the 1970s),  there remain good reasons for thinking that large companies with strong fundamentals and global reach are liable to perform well in the shifting global environment we now face. They certainly look a better bet in relative terms than anything you can find in the bond market, in which for all their diversification value, it is surely only a matter of time before the secular bull market of the last 25 years finally runs its course.