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I have been finding a lot of attractive British stocks lately. They seem to have compelling stories and very good dividend yields. Here is some of what I mean.
Allied Domecq (AED): Among other things owns Dunkin Donuts and Baskin Robbins yields 2.3%
Barclays Bank (BCS): Owns the iShares business yields 2.7%
BT Group (BT): Big phone company yields 3.6%
Glaxo (GSK): One of the drug companies that hasn't been hurt yields 3.1%
Lloyds TSB (LYG): Smallish bank with good valuations yields 7%
National Grid (NGG): Utility yields 3.4%
Pearson (PSO): Media company yields 2.9%
There are more names but you get the idea. The problem lies in the chart I pasted above. The British yield curve is inverted. This means a recession is coming. The yield curve has been inverted for a short while but the stock market has not started to roll over yet. I own two British names for clients. One name is a consumer staples name that yields 4% at current prices. I expect I will sell this stock in the next couple of months. The other name I own is British Petroleum. I expect what is going on with oil to trump problems with England's economy so I think I will keep that one.
I suppose this time could be different but the biggest problem, I think anyway, is that it is very difficult to access capital when the curve is upside down. This stifles the economy. This is not the type of thing I want to try to out smart. Too bad because a lot of the names I've listed are compelling but top down starts with the big picture which says avoid or be underweight England.
2 comments:
Roger, you may know the hot UK house market has been a preoccupation of the Bank of England for some time. It's why in a inflation-benign environment they've pushed rates up. House prices have responded to the downside - just check out the response of sterling since yesterday: short rate rise expectations have evaporated.
I guess this is a long way of saying that I don't think a 2005 UK recession based on what the short-end of the curve is doing an obvious outcome given the big impact on rates recently by house price concerns at the BoE (indeed, the 2.5yr to 10yr real curve is flat-positive). It's also notable that the curve has been persistently negative before without recession (as defined by 2 Qs of falling GDP). Just check out what UK GDP was doing during the US recession of Q1 2001 to 2002.
But then check out what the London markets were doing at the same time and it looks like it may be worth paying more attention to the US markets for a clue to the path the UK equities will take. Historically they are in step; and right now the US yield curve is positive.
I'm not saying UK equities will rise; or that US equities will rise. I just saying my non-statistically tested knowledge indicates that what the $SPX does is more likely to have an impact on what the FTSE does than the slope of the UK yield curve. Especially for the internationally exposed UK equity.
Apologies for the length of all this (isn't there a rule about making a coment longer than the original post?), and for anything the pontification-filter failed to catch.
I also emailed this response to Alzhar
Alzahr,
I hope all is well, funny stuff about the length of the comment.
A few years ago the UK curve inverted and the equitiy market lagged. I believe it was during 1998, the FTSE got pasted. I'm not sure why it inverted then, but I agree with you about why it is inverted now. The inverted curve issue is about accessing captial, not why its inverted. I believe there will be a recession but I could absolutely be wrong. I just figured out how to articulate everything I am trying to do for clients, avoid down a lot. The history that goes with inverted curves is not good. We'll see. Thanks for reading and thanks for the post. cheers!
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