Another bunch of interesting charts which speak to a bigger story to kick off the week.

Lets’ kick off with the fintech revolution in the Covid 19 world.

All manner of digital claims have been made involving the virus over the last few weeks. Clearly the three most obvious points to make are

  • That we’re all stuck using video conferencing software which has fuelled Zooms share price to lunatic levels
  • That cash is really looking a dated relic now. Virtually everywhere I go, cash is now actively shunned and even the most technically resistant are now making the move to digital money. I would suggest that we could see cash abandoned within the next five years. Concurrent to this I think the pressure for central bank digital money will also grow. It would make flushing helicopter money into our accounts so much easier!
  • The digital divide in terms of broadband is becoming ever more important. BT really cannot hide behind its excuses to narrow the divide and allow people to work from rural homes.

Beyond these three truths I would also suggest another crucial trend. On paper Fintech does look a bit vulnerable during the market unrest if only because so many of the businesses are early stage, dependent on private capital and vulnerable to competition from big scale banks. But I would counter this by saying that as we are all forced to transact digitally, the existing legacy banking and financial platforms begin to seem rather out dated and frankly sub standard. Also, as household budgets are stressed, many more consumers (and businesses) will look for any competitive savings to help balance the books.

So, in sum, this brutal cycle could work either way for fintechs. In essence the precise impact will vary on the type of fintech business and how cylical its underlying business is.  The chart below is from fintech investment trust Augmentum and nicely maps out how different parts of the fintech spectrum might react to the twists and turns of the business cycle. Obviously, as a fintech VC, it has its own businesses to promote but overall I think this is an elegant summary of how the industry might evolve over the next year. As an aside the report is called “Fintech in the Eye of the Storm”.

Next up two very straight forward charts from star analysts at SocGen. The first is from Albert Edwards, their global strategist. It shows the 12 month forward PE ratio (assuming you can believe any numbers inputted into the model) and  long term EPS growth. If we could overlay the Schiller CAPE index over the chart the message would be even clearer – markets have raced ahead of likely earnings.

Albert’s colleague Andrew Lapthorne, chief global quant strategist at SocGen has another interesting, though very different chart – one I haven’t seen before.

We’ve all seen those charts showing motor traffic is rising, this one shows community mobility reports (I assume involving walking and driving) for a number of ‘functions’.

Clearly wandering around the home (probably aimlessly or drunkenly) has increased (!) and grocery and pharmacy shopping has picked up again after an initial decline. Notice though how low mobility is for workplace, mass transit and recreational mobility. Bar a small increase for workplaces (as you’d expect), no real sign of an end to the lock down here!

Why dividends (still) matter

Last but no means least we return to the subject of why dividends (still) matter – the title of a new research report by the equity income team at Guinness Asset Management. It’s written by Ian Mortimer & Matthew Page, portfolio managers on the Guinness Global Equity Income Fund.

They make the point I’ve also been banging on about. Sure, dividends are likely to take a massive hit in the coming year, but over the long term the story should/probably will, remain the same – namely that dividend yields, their increase over time and their reinvestment back into stock are the key drivers of total returns over multi decade timespans.

They also make the valid point that investors should recognise that it’s not just the blue‐chip stalwarts which pay a dividend. “Over the last ten years we have seen more companies in ‘non‐traditional’ income sectors such as Information Technology initiate dividends. These ‘new’ dividend‐paying companies can also provide the investor with the ability to capture a potentially growing income stream, which acts to further compound many of the positive effects such as inflation hedging, or the benefits of compounding over the long term”.

The two charts below nicely remind us why dividends are so horribly important. The first looks at returns from 1972 through to 2019 for a variety of strategies including simple index hugging and avoiding dividend paying stocks through to a sensible strategy of buying into dividend growers and those businesses that initiate a dividend.

The second chart reminds us that even in the growth oriented US market, over the long term dividends have been a huge source of total returns from investing in American equities.