Oman Ten good reasons to invest in equities |
Oman Daily Observer - 17 July, 2012
Equity investors are experiencing difficult times: For several years now, stock markets have been marked by high volatility, with only temporary rallies. However, while caution may be advisable over the short-term, there are many good reasons to invest in equities over a longer horizon, as illustrated by Bank Sarasin’s latest Investment Focus.
At present, equity prices are negatively impacted by fears about political and economic development within the euro zone as well as uncertainties concerning the global economy.
Over the short-term, the environment is likely to remain challenging for equities. While Bank Sarasin therefore currently recommends underweighting equities in investors’ portfolios, there are good reasons to establish long-term equity positions, particularly during market downturns.
Despite the media’s overemphasis on equities’ disadvantages, such as their higher risk compared with fixed-income investments, speculation-driven price valuations, and price dependence on the economic cycle, investors need to consider their long-term holdings.
There are 10 arguments in favour of equities, some which directly benefit investors, and some which benefit the markets and economies as a whole. These are:
1) Equities can generate attractive returns over a medium- to long-term horizon.
2) Along with price development, the distribution yield is one important component of the total return from an equity investment. Distribution yield is defined as how much cash flow is being generated from an equity position in the form of dividends. Falling prices on the stock exchanges provide investors with the opportunity to buy corporate equities at low prices, which drives up the annual distribution yield (provided dividends remain the same). In the current low interest rate environment, this increases the relative attractiveness of equity investments.
3) Through stock exchanges, investors can implement their investment decisions swiftly. Compared to privately-held corporate investments or real estate, listed companies can be bought and sold very easily. Particularly in uncertain times, liquid investments may provide an invaluable advantage.
4) Equity investors provide the economy with capital, contributing the financial fuel that a functioning economy requires. The capital market matches companies seeking funds with investors prepared to invest capital. A stock-exchange listing facilitates access to equity capital, while trading platforms promote market liquidity, decrease transaction costs and create a level of market transparency that provides a certain degree of protection from manipulation.
Patrick Hasenboehler, equity analyst at Bank Sarasin & Co Ltd, said: “In view of the current economic uncertainties, investors should favour blue chips, such, Air Liquide, Allianz, Anglo American, AT&T, BG Group, Ems Chemie, Fresenius Medical Care, IBM, Intertek, L’Oréal, Microsoft, Mobimo, Nestlé, Novartis, Roche, Schindler, Sulzer, Swatch Group, Swiss Re and Zurich Insurance Group. These high-quality stocks are characterised by a high-potential business model, responsible conduct on the part of the management vis-à-vis both shareholders and external stakeholders, and a compelling financial track record.”
5) The equity market gives every investor the opportunity to invest in companies whose business model they find convincing. This enables private investors to share in the success and capital growth of Apple and McDonald’s but not in that of Ikea or Red Bull, since these companies are privately held.
6) Not only investors but the public at large benefit from the fact that exchange-listed publicly held companies are required to regularly report on their business development and financial situation. Along with the potential participation in the decision-making process, this level of transparency is an advantage for shareholders.
7) A functioning share market and a high level of acceptance of share ownership from the public contribute to the success of an economy. Countries with a high market capitalisation per capita also tend to have a higher gross domestic product per capita.
8) In an inflationary environment, equity investments can protect investors against
depreciation via rising corporate profits. Moreover, by buying equities, investors become part-owners of the companies they invest in, thereby acquiring interest in the real estate, machinery, products, etc owned by the listed company.
9) Even small allocations provide the benefits of risk diversification when investing in equities. This makes it easy to follow the most important investment rule: Do not put all your eggs in one basket.
10) Over the long term, equity investments produce higher yields than fixed-income securities.
The longer the investment horizon, the better equity investors fare.