Investors should focus on total return indices rather than stock valuations to gauge a long-term measure of the market, according to Standard Life Investments.
The asset manager said that while the current equity rally might have increased investor confidence, it does not provide a full market outlook.
“To get a better indication of the real impact of recent market trends on equity portfolios it is much more sensible to consider total return indices,” Standard Life Investments’ head of global strategy, Andrew Milligan, said.
“This measure not only captures a more accurate reflection of the long-term drivers of equity returns but may also prove an invaluable tool as we look to track changing corporate behaviour.”
Mr Milligan said that in the UK, the FTSE 100 Index saw an increase last year of 12 per cent on 2011.
Positive total returns were also seen in the United States, as the S&P 500 Index posted a 16 per cent return, up from 2 per cent in 2011.
“This meant that, despite a year of macro ups and downs, the US equity market outperformed all ready alternatives on a total return basis, including corporate bonds, government bonds and cash,” Mr Milligan said.
Standard Life said the total return indices show the value of investors moving back towards the equity market in order to find high yields.
“This dichotomy between total returns on the one hand and valuations/sentiment on the other is striking,” Mr Milligan said.
“A repeat of last year’s return environment in 2013 would certainly prompt serious questions about the recent trend for investors to cut equity exposure in favour of fixed income weightings.”
