Market can still offer a solution to low returns

When markets are stampeding towards the cliff, only the brave or utterly foolhardy look at the carnage left behind. But it is perhaps time that we did. Last week the scramble out of shares wiped 5.2 per cent off the FTSE100 index and pushed the yield on ten-year government bonds down to 2.53 per cent – the lowest according to the Bank of England, since 1899.

So, with inflation as measured by the Consumer Price Index rising to 4.4 per cent, and the headline RPI measure already at 5 per cent, investors are expressing a preference for an annual negative return after allowing for inflation of at least 1.87 per cent (2.47 per cent on the RPI measure).

In the current market storm, “there’s no hiding place from inflation” is the common cry. But actually there is, for those brave enough to look behind at the carnage left in the UK stock market.

Here we will find a considerable number of shares in FTSE100 companies yielding more than 5 per cent. I have listed seven for special mention here. All these are large companies, spread over a wide range of sectors including pharmaceuticals, insurance, and utilities.

Now the stock market is a wild place at present. Prices are volatile, so an investor is taking a risk in these conditions. But these shares are in companies with notable defensive characteristics – that is, likely to shown resilience in times of economic slowdown. And they have ample cash resources available to sustain dividend payments.

The list includes drugs giant GlaxoSmithKline, Standard Life – which announced outstanding results recently – and National Grid. Resolution has just announced a hefty increase in its dividend and has a healthy cash balance.

Nor does this list exhaust a selection of large companies sporting inflation-beating dividends. These are not exactly in Wild West speculative country. There is Vodafone (5.9 per cent), United Utilities (5.6 per cent), and right on the CPI inflation line, Tesco, yielding 4.4 per cent.

Both US and UK central banks have indicated a commitment to keeping interest rates low for the foreseeable future. Government bond yields are thus unlikely to snap back in a hurry. When the market calms down, as it will, shares of leading companies paying attractive above-inflation dividends are the ones most likely to attract support.

Continental shift as focus moves east

This year’s convulsions in America and Europe are the latest in a series working to accelerate an epochal shift in finance and investment from west to east. Most retail investor portfolios now have a substantial percentage invested in developing country markets – Asia Pacific in particular. While these have not escaped the widespread markdowns on fears of an economic slowing world-wide, they are likely to show greater resilience – and stronger recovery prospects – in the period ahead.

Last week brought plenty of pointers in the corporate realm. Paul Polman, chief executive of consumer products giant Unilever, declared that Europe and America were entering a period of low growth so the group is now planning to have 75 per cent of its revenues in emerging markets by the end of the decade. And Martin Sorrell, chief executive of advertising giant WPP, warned in a newspaper interview of three years of hard slog ahead for Europe and America. “If you are an international company,” he added, “ you are going to invest more of your increment or your portfolio or your capital in the Brics [Brazil, Russia, India, China] and the Next 11.”

This epochal change in the world economy takes centre stage in a series of debates on the rise of Asia as part of the Edinburgh International Festival. Scots-born historian Professor Niall Ferguson will chair Continental Shifts, a series of discussions presented in association with the British Council Scotland, The Royal Society of Edinburgh and the Confucius Institute for Scotland.

Ferguson – author of books including The Ascent of Money and presenter of the recent BBC TV series Civilisation: Is the West History? – is set to chair two debates on India’s role in the 21st century on Saturday 27 August. This is an important series of discussions, central to our understanding of the bigger sweep of today’s convulsions.

How reassuring that the entire festival has not been reduced to ten-a-penny comedians, plays with no actors and one-legged Hungarian mime artists. More information on this important event can be obtained at http://www.eif.co.uk/series/continental.