A recent report from McKinsey proclaimed that “it would take catastrophic changes in real economic performance spread over multiple decades in the real economy, or a fundamental shift in investor behaviour – unlike anything we’ve seen in more than a century – to reduce long-term equity returns to below around 5% in developed markets.”
Yet, even with the markets touching record highs, the experience of many investors in developed markets has been 13 years of volatility in order to stand still since 2000.
Some fund managers believe markets will, by and large, continue to hover around that level. Others say that in the absence of anything else practical to do with cash, flows into stock markets will automatically make them go up.
In the cautiously positive camp is Justin Urquhart Stewart, co-founder of Seven Investment Management. “Companies are coming out with quite good results, producing profits and paying dividends,” he said.
“So given that everything else worth investing in isn’t worth investing in, equities are the only game in town. There’s no reason you would expect huge gains from here, and there will be some pullbacks, but the difference between this and last year is people will be buying on the dips.”
In his view, the global economy is healing and a great deal of money is coming out of cash. If the market passes the German election later this year without any disaster in the meantime, sentiment should continue to improve, he says.
In the negative camp is Mark Tennant, chairman of Bluerock Consulting. “My own view is we’re entering a period in the developed markets – the US, UK and Europe – which Japan entered in 1991,” he said. “We’ve flatlined for 13 years now, and we’re probably going to flatline for another 13 years. It will go up and down, but the economy is not getting traction.”
He blamed two things for that: the amount of wealth that was wiped from the market in 2008; and the increasingly ageing demographic in the west, with people moving from saving to spending their savings in retirement.
BROADLY POSITIVE
On average, though, managers appear to be broadly positive. HSBC's quarterly survey of fund manager sentiment found 57% of global fund managers favouring equities in the second quarter of 2013, with nobody underweight; 57% were also positive on North American equities (14% underweight), 43% on Europe ex-UK (14% underweight), and 57% emerging markets (none underweight).
Economists tend to have divergent views on different parts of the world equity market, dispelling the sense that a rising tide lifts all boats.
At Credit Suisse, for example, chief global equity economist Andrew Garthwaite is underweight continental Europe – and deepened that underweight position in March – on the grounds that it is expensive on price/earnings ratios compared to global markets.
But he is overweight Japan and emerging markets, citing seven reasons in an April briefing note, ranging from their price/book discount to global markets, to capital flows and their relative underperformance relative to emerging market fixed income.
But emerging markets also divide investor opinion. Tennant, otherwise thoroughly bearish, believes the world is in “a situation where emerging markets outperform developed markets for a long period of time.”
“The fact that developed markets don’t have enough money to buy their goods is not going to be terribly helpful,” Tennant said, adding: “You’re going to see a lower rate of growt h, but growth we will see.”
Urquhart-Stewart, in contrast, said China was “going to have more issues” than the West. “It’s not a matter of a hard or a soft landing - they’ve landed in a swamp,” he said.
“With a banking system that makes our banks [in the UK] look quite good, and an accounting system that is nothing if not imaginative, people will not pin too many hopes on that.”
In Asia, in a new report to clients this week, Credit Suisse recommended investors buy “undervalued Asian recovery stocks with a positive catalyst from quarterly earnings surprises.”
And HSBC’s head of equity strategy, Herald van der Linde, told clients in April he “continues to see 15-20% upside in Asian equities in 2013.”
- As every year, Emerging Markets is reporting live from the Asian Development Bank meeting taking place in Delhi at the beginning of May. Pick up your copy of the newspaper at the meeting (first print issue on May 4), download the free app for live updates, check out our website and follow us on twitter @emrgingmarkets