Clients are making the wrong assumption that recent strong markets will continue over the next financial year.
That’s according to Wingate Asset Management, which is preparing for a drop in equities valuations.
Chief investment officer, Chad Padowitz says that there are considerable risks in international markets, and the market isn’t pricing these risks into equities valuations.
“In reality, there are four unprecedented fiscal and monetary experiments happening around the world at the moment, of which the consequences are still unknown, and Wingate is focussed on responding to these.”
Padowitz is referring to activities happening in the US, Europe, China and Japan.
“There is no precedent to what is happening in these financial markets and their economies, and each has come up with an approach that can really only be described as an untested experiment.”
While the US is applying a transparent form of extreme monetary accommodation alongside increasing fiscal restraint, Europe is desperately trying to keep monetary unity among countries with differing fiscal and competitive positions. Padwitz says that this is forcing ‘on-the-fly’ solutions to each unique crisis with no well-defined broad approach other than ‘whatever it takes’.
“Meanwhile, in Japan we are seeing a frantic attempt to conjure up long-lost growth through its ‘three arrow’ initiative – essentially, spend more, print more, and add flexibility to the economy, and China, while regarded as the growth engine of the world, appears to be doing anything but grow. Turning around a $5 trillion machine, weighted in favour of investment spending over consumer spending, is a difficult proposition.”
He says that only one experiment needs to fail for the effect to be felt globally. In light of this, it is surprising that the market is pricing in double digit earnings growth rates for the US and Western Europe, and even stronger growth in Japan, says Padowitz.
“Personally, I am uncomfortable with many of the assumptions underpinning these growth forecasts, and my view is that the risks surrounding quantitative easing and corporate earnings growth are being mispriced.”
While there will be some opportunity, he says that clients will have to be very selective and “really do their homework”.