Institutional investors want to be buyers in this stock market. Nobody is expecting runaway capital gains by any stretch, but, for the most part, institutional investors have no other asset in which to speculate with a similar risk profile. While U.S. Treasuries are safe, their returns are miniscule. Commodity markets are inherently risky and a stock market mutual fund isn’t going to turn into a managed futures fund or real estate investment trust on a whim. No, institutional investors are clamoring to buy stocks, but they need a good reason to do so.
It’s actually a good time for institutional investors; running money for clients is easier when expectations are very low. Right now, nobody expects the main stock market averages to do much. It therefore becomes easier to beat the S&P 500 benchmark in a generally low return environment. All institutional investors have to do is own the right basket of stocks. And, clearly, higher dividend paying stocks will continue to play a key role in outperformance this year and next.
For any investor, stock-picking among blue-chips is a more welcome exercise over finding the next big thing. There’s a lot of information publicly available and, because of the exposure that large-cap companies have, it’s easier to predict the flow of cash from these enterprises. In addition, investment risk is different. An investor in blue-chips isn’t just betting on an entrepreneur, but typically a well-educated management team with lots of experience. Regardless, what’s old is new again and the best stocks in this kind of market are in fact blue-chips that pay increasing rates of dividends. It isn’t a fancy investment strategy, but, over the last few years, it’s proven to work beautifully. (See All Global Investment Risks Point to a Steady Dollar Mediocrity in Stocks & Metals.)
The stock market today is still suffering from an identity crisis related to a lack of certainty in the global economic landscape. Accordingly, we’re going to have choppy trading action replete with reversals. Predicting where the broader market is going to go this year and next is almost foolish. If corporate earnings grow 10%, the stock market could still tank on the eurozone debt crisis.
It is a good stock market in which to be an institutional investor, picking stocks in a slow growth environment. It’s a much more difficult environment to be an individual investor, because you don’t get paid to buy stocks. Investor sentiment among institutional investors is improving, while recognizing that investment risk in capital markets remains high. We have a stock market today where almost all eventualities are possible and this has made investors gun shy. Accordingly, conservative blue-chips are looking more and more attractive because they provide relative certainty that a global marketplace that cannot.
Over the coming quarters, institutional investors will be talking about dividends in the stock market. The hottest stocks this year are likely to be the most boring. But, then again, in business, all that really matters is what works. The high-flying days of the dotcoms have been usurped by railroad stocks. For institutional investors, life is now a lot easier. For individuals, there’s no wind at your back.