Dubai: Equity valuations around the world and particularly in the US are at elevated levels compared to their historical averages but there is still potential for further growth given the supporting macroeconomic environment, David Pinkerton, the chief investment officer of Falcon Private Bank, an Abu Dhabi-owned Swiss private banking boutique said in an interview.
“When markets are cheap, the forward returns are high. The forward looking returns for US equities are currently below the average because of the elevated valuations. If one has the capacity to hold the shares over a longer period, we could still expect a positive return,” said Pinkerton.
Although equity valuations remain high, he said in relative terms, equites are more attractive than bonds in the current environment. “Historical data show equities tend to outperform bonds even in periods of deflation and when we are in a rising interest rate environment equities perform massively better than bonds,” he said.
The expectation in the market is that the US is heading into a period of higher inflation and higher interest rates. But if the economy slips into a recession at some point, returns on equities are likely to be negatively impacted.
Infrastructure investment
On the policy front the Federal Reserve and the US government are moving ahead with pro-inflation initiatives. The infrastructure investment theme of Trump administration is looking at higher inflation through fiscal boost. The government is likely to seek debt funded infrastructure investment strategy and eventually inflate the economy out of debt that is to say with higher inflation and higher nominal GDP is expected to trim the debt to GDP ratio.
The room for inflation is limited because new technologies are driving down consumption prices, but from policy perspective inflation is the most effective and less painful way out of a higher debt to GDP ratio.
Geopolitical issues in general and current US stand-off with North Korea dominate the major risk factors facing global growth and equity markets outlook.
“The potential impact of hostilities between the US and North Korea on US stocks could be short term in nature while the impact could be more pronounced in Asia, particularly in countries that closer to the potential conflict zone,” said Pinkerton.
Digital technologies
He expects digitisation to bring the next wave of investment opportunities and equity market gains. “New digital technologies are already revolutionising banking, financial services and manufacturing. Application of digital technologies like the Blockchain across various sectors of the economy will transform the world economy in a magnitude to the degree that the internet transformed the world,” he said.
While global equities are expected to deliver positive returns, Falcon expects 3 to 4 per cent return per annum for broad equity indices with opportunities for enhanced returns for themes and sectors. While emerging markets continue to face some risks, like currency risks and elevated levels of debts in the near term, developed market bonds are out of favour because of relatively low returns.
Emerging markets local currency debts continue to face currency risks. However he said there good quality dollar denominated credit available in the market, particularly issues from the GCC region that deliver 5 to 6 per cent return that are viewed as selective opportunities in the emerging markets bond space.
