Are equities overextended?

Following the reversal post a decade of quantitative easing (QE), a backdrop of rising interest rates and political uncertainty in the UK, US and Europe, many are debating to what assets they should allocate their money. Some investors are concerned that an interest rate-hiking cycle will see bond returns depressed, whilst others believe the nine year equity market bull run is likely to come crashing to a halt. These are of course, legitimate concerns but, as long-term investors, what are we focusing on?

The outlook for UK equities

To deal with equities first, whilst we are undoubtedly in an extended bull run, valuations look fair with the market valued  at 14 times projected corporate profits. Purely in price terms, the market is up just 29% in a decade and 50% over twenty years. To us, this does not look like a particularly overextended market, especially considering the 4% dividend yield also on offer.

Source: Morningstar Direct, as at 06/06/18. Past performance is not a guide to future performance.

What also needs considering is how equities have performed over history. Since the inception of the FTSE’s price data in 1962 investors have generated positive returns for almost all ten-year time periods. Looking at this entire 56 year range on a rolling month-by-month view, you would have had an 82% chance of generating an annualised return of greater than 2.5%, excluding any dividends, over any ten year holding period. Once dividends are included and reinvested the return profile becomes even more attractive.

The graph below highlights all of these discrete periods, split into the annual returns generated. When holding UK equities for ten years, negative capital returns are a rarity. Indeed, the average annual return (excluding dividends) is a very solid 7.5%.

Source: Morningstar Direct, as at 06/06/18. Past performance is not a guide to future performance.

The outlook for fixed income

This brings us on to the outlook for sterling fixed income assets. We are more optimistic on the outlook for equities over fixed income but, as multi-asset investors, would also stress the need to maintain a diversified portfolio suitable for your level of risk. Having not seen a rate-hiking cycle for many years, some investors are worried about the place fixed income has in client portfolios, particularly when they need to be defensive.

However, since the launch of the FTSE Actuaries UK Gilts Index 42 years ago, gilts have only ever delivered a negative nominal total return in four calendar years. Even when rates have risen in a year, the average annual total return has been 6.2%. Gilts have also exhibited just half the volatility of the UK equities, highlighting their use as part of a diversified portfolio. This example just considers gilts as the ‘base’ fixed income exposure for UK investors, yet there is the potential to add additional returns through diversification into a portfolio of actively managed corporate bonds for example.


Therefore, although we currently prefer the outlook for equities over bonds, maintaining an appropriately diversified portfolio is so critical. This can be tricky as it is often tempting to shift your exposure aggressively. Some tactical and strategic weightings are important, but maintaining a reasonable level of exposure to different assets acts as an important counterbalance and aims to deliver a less correlated return whilst minimising losses. For example, over the last decade multi-asset funds have generated better risk-adjusted returns than the equity market on average, despite a lower total return. Given the varying and ever-changing nature of a client’s capacity and tolerance for risk, we believe this is an important point worth highlighting.

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at

Data Source – © 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Source: FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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CLI01223 Expiry 7 June 2019

David Marchant

David Marchant

Chief Investment Officer, Canada Life Limited & Managing Director, Canada Life Asset Management Limited.

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