Ritchie told us, at length, that UK stock markets are over valued and about to crash.
Citi tells us something different:
The unpopularity of British shares has driven prices down and dividend yields up. The FTSE All Share index has gone nowhere this year and now yields close to 4pc.
The gap between the dividend yield from the FTSE All Share and the yield available from 10-year government bonds (gilts) – known as the “yield gap” – is a popular valuation metric.
A small gap or negative figure (when gilts yield more than shares) may indicate that the stock market is overvalued, as investors are not being adequately compensated with dividends for the additional risk they are taking by investing in shares.
If shares yield appreciably more than bonds, it is an indication that shares may be undervalued. This carries particular weight during times of high inflation, or when there is the threat of rising inflation, when investors are less willing to accept low bond yields.
The yield gap between British shares and gilts has been increasing since 2013 and is currently at 2.2 percentage points, after a peak of 2.4 points in 2017. The only other years on record in which it has been higher than this were during the First World War, two of the interwar years and during the Second World War, according to data compiled by Citigroup, the bank.
Not that I’d wholly buy the Citi story there. But it’s an interesting valuation metric so why the difference? The Senior Lecturer getting such a different answer?
Ah, yes, that’s it. Back in that Pensions for the Future paper with Colin Hines they showed us the return from gilts against the returns from shares. A calculation where they left out dividend income but included interest income.
A 4% yield makes no difference because they don’t include it.