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Should investors avoid Britain?
In the April monthly note, PIMCO’s Bill Gross states that Britain risks facing a vicious cycle of rising debt costs as investors demand a penalty fee on gilts to protect against inflation. Along with Greece and other Eurozone’s Club Med countries UK is on PIMCO’s “must-avoid” countries.
From a recent article:
“The flood of British debt is likely to “lead to inflationary conditions and a depreciating currency”, lowering the return on bonds. “If that view becomes consensus, then at some point the UK may fail to attain escape velocity from its debt trap,” he wrote in his April monthly note.
Mr Gross said the UK is not yet in crisis but gilts are sitting on a “bed of nitroglycerine” and must be handled delicately. Spreads on 10-year gilts have crept up to 14 basis points above those of Spain, itself in some difficulty.”
A British fund manager noted that the market is at fair value based on forward P/E ratio. According to Morgan Stanley this ratio must be just above 12x earnings for the market. But based on the ‘Schiller PE’ ratio, the UK is valued at 15x times earnings for this year. This would mean a rise of 20% in share prices from current levels. However that is unlikely. According to Ted Scott, director of UK Strategy for F&C; Investments there are far fewer large growth companies in the UK than a decade ago and the current recession is likely to hold back growth for many years.
The public sector net debt as a percentage of GDP stood at 60.3% at the end of February compared to 50.5% at the end of February 2009. The unemployment rate reached 7.8% at the end of January.However public sector employment increased by 7,000 in fourth quarter of 2009 to reach over 6 million. Similar to many states in the U.S., public sector employees are paid lavishly in the UK and are kept on payroll despite lack of work. The unionized public workers are a major burden on British taxpayers.
More than 50% of earnings of the FTSE 100 index companies come from emerging markets. The majority of these companies are in the mining, consumer goods and energy sector. Hence investors still have opportunities in the British market but have to be highly selective. For example, British&Dutch; consumer giant Unilever(UL) has a strong presence in many emerging markets. But banks such as Llyods Bank (LYG) and Royal Bank of Scotland(RBS) are still struggling with losses and can be best avoided. The British government also own major stakes in them after their bailouts during the financial crisis.
Ten Components of the DJ Canada Select Dividend Index
The Dow Jones Canada Select Dividend Index represents Canada’s leading stocks by dividend stocks.
The main features of this index are:
- Thirty stocks in this index are selected based on dividend yield
- Stocks are weighted by annual dividend
- The current yield is 4.32%
- Last year this index was up by 38%
- Heavy concentration in financials
- Index re-balancing is done annually
The Top 10 Components of the Dow Jones Canada Select Dividend Index with their current yield are noted below:
 1. Canadian Imperial Bank of Commerce (CM)
Current Dividend Yield: 4.65%
2. Bank of Montreal (BMO)
Current Dividend Yield: 4.52%
3. Toronto-Dominion Bank (TD)
Current Dividend Yield: 3.21%
4. National Bank of Canada
Does not trade on the U.S. exchanges
Current Dividend Yield:N/A
5. Manitoba Telecom Services Inc.
Does not trade on the U.S. exchanges
Current Dividend Yield: N/A
6. Royal Bank of Canada (RY)
Current Dividend Yield: 3.36%
7. TELUS Corp.(TU)
Current Dividend Yield: 5.17%
8. IGM Financial Inc.
Does not trade on the U.S. exchanges
Current Dividend Yield: N/A
9. Bank of Nova Scotia (BNS)
Current Dividend Yield: 3.84%
10. Power Financial Corp.
Does not trade on the U.S. exchanges
Current Dividend Yield: N/A
Five Foreign Stocks Paying More Than 5% Dividend Yields
There are many foreign ADRs paying high dividends. Even after the run up in stock prices since the March lows of last year, one can find find solid companies that offer above-average yields.
Five ADRs paying 5% or more in dividend yield are listed below:
1. Administradora de Fondos de Pensiones Provida SA (PVD)
Chile
Current Dividend Yield: 7.27%
2. Magyar Telecom (MTA)
Hungary
Current Dividend Yield: 9.29%
3. City Telecom Ltd (CTEL)
Hong Kong
Current Dividend Yield: 5.10%
4. Repsol YPF (REP)
Spain
Current Dividend Yield: 5.01%
5. Philippine Long Distance Telephone Co (PHI)
Philippines
Current Dividend Yield: 6.08%
Canadian Banks’ Equity Third Worst in the World
An interesting article by Peter Boone and Simon Johnson of The Baseline Scenario blog discussed about the effects of regulatory constraints on Canadian banks.
From The Canadian Banking Fallacy article:
“Despite supposedly tougher regulation and similar leverage limits on paper, Canadian banks were actually significantly more leveraged – and therefore more risky – than well-run American commercial banks.  For example JP Morgan was 13 times leveraged at the end of 2008, and Wells Fargo was 11 times leveraged. Canada’s five largest banks averaged 19 times leveraged, with the largest bank, Royal Bank of Canada, 23 times leveraged.  It is a similar story for tier one capital (with a higher number being safer): JP Morgan had 10.9% percent at end 2008 while Royal Bank of Canada had just 9% percent. JP Morgan and other US banks also typically had more tangible common equity – another measure of the buffer against losses – than did Canadian Banks. ”
A January report from McKinsey Global Institute shows that, based on assets to equity ratio Canadian banks are not in great shape. In fact, globally they are the third worst after Switzerland and Japan.
Before the financial crisis, Canadian banks ranked 4th in terms of leverage ratio.
Source:Â Debt and Deleveraging: The global credit bubble and its economic consequences, McKinsey Global Institute
The five Canadian banks trading in the US markets are Royal Bank of Canada(RY), Toronto-Dominion Bank (TD), Bank of Montreal(BMO), Bank of Novo Scotia (BNS) and Canadian Imperial Bank of Commerce (CM).