Investec Asset Management co-head, multi asset, Phillip Saunders said while it will not be a smooth and easy ride for equity markets over the next three years, and there will be corrections along the way, investors are likely to be rewarded for staying the course.
Mr Saunders said a rise in US interest rates will be very gradual and, excluding an inflationary flare-up, the peaks in short- and long-term interest rates are likely to be at lower levels than in prior cycles.
“In fact, a return to a more normal environment should bolster confidence and the real economy,” he said.
The outlook for corporate earnings is improving and corporate profitability is likely to remain high, Mr Saunders added.
“After two years of relentless downgrades to forecasts of corporate earnings in the US and nearly three years elsewhere, forecasts are at last stabilising,” he said.
“Corporate profitability is at historically high levels in the US, but not in the UK, Europe or Japan – even in the US, it will take either a recession, not likely for some years, or rising costs to squeeze profitability, but even this is unlikely to threaten the secular case.”
Mr Saunders said that while markets are no longer cheap, they are likely to become more expensive before they revert to reasonable or even cheap valuations.
Value has become compressed in most equity markets after five years of bull market cycles, but the premium for companies offering above-average growth is still moderate, due to residual scepticism about growth.
Mr Saunders said investors are also 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,” said Mr Saunders.
“We believe we are far from the reckless euphoria that has characterised the peaks of past cycles.”
AMP Capital chief economist Shane Oliver also believes there is too much scepticism for equity markets to be in the stage of euphoria with the broader trend of the market likely to remain up.
Speaking at CPA Australia conference in Sydney, Mr Oliver said that broadly, equity markets are not overvalued and the stocks that are overvalued are “nowhere near their 2007 highs”.
“The measures we’ve used for many years show US markets are still somewhat cheap,” he said.
The IMD World Competiveness Centre’s director and professor of finance, Arturo Bris, conversely believes that stock markets have performed “unrealistically well” since the GFC and predicts the global economy is headed for another crisis.
