- Equity markets continue to climb the proverbial ‘wall of worry’
- Investec's Multi-Asset Team thinks there is a good case that they will continue to do so
Five years into an equity bull market and it seems deeply unfashionable to be an optimist. Philip Saunders, Co-Head of Multi-Asset at Investec Asset Management, outlines reasons why equity markets continue to climb the proverbial ‘wall of worry’ and, on balance, and why he and the team think there is a good case that they will continue to do so.
1. Inflation – the dog that didn’t bark
Persistently low inflation rates allow both long and short-term interest rates to remain low, reducing the risk of recoveries being crushed by tight monetary policies.
2. A long cycle?
Currently there are very few late cycle economic indicators flashing warning signs such as escalating wage pressure or an uptick in consumer credit.
3. Should we fear US interest rate normalization?
The rise in interest rates will be very gradual and, excluding an inflationary flare-up, the peaks in short and long-term real interest rates are likely to be at lower levels than prior cycles.
4. The outlook for corporate earnings is improving
With the global growth rate turning up, global earnings growth could be in high single digits both in this year and next.
5. Corporate profitability is likely to remain high
The growing competitive advantage of US companies in key sectors owing to leadership in technology and innovation suggests that it may continue to rise while the ease with which goods, services, people, businesses and capital moves around the world in the era of globalization makes it very difficult for national governments to intervene.
6. Valuations are reasonable
Markets are likely to become expensive before they revert to reasonable or even cheap valuations. With bond yields at or near multi-century lows and residential property prices in major cities around the world at sky-high levels, why should caution rule equity valuations?
7. Time to pay up for growth?
Value stock opportunities are now harder to find. However, the premium for companies offering above average growth is still moderate, probably due to residual skepticism about growth.
8. Investors are belatedly returning to the market
Equity funds have seen strong inflows in the last 18 months, but these have not recovered the outflows of the previous five years. Investec believes that we are far from the reckless euphoria that has characterized the peaks of past cycles.
For Investec AM, it certainly won’t be a smooth and easy ride over the next three years and inevitably there will be corrections along the way, but investors should be rewarded for staying the course.
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