Schroder Investment Management is underweight equities in the belief stock markets look expensive, p...
Schroder Investment Management is underweight equities in the belief stock markets look expensive, particularly in the US.
David Gasparro, head of the investment strategy unit at Schroders, told IFAs at its recent roadshow US equity valuations have reached P/E ratios of over 30 times in the recent bull run, compared with a P/E ratio of around 15 times in 1970.
He added: "We have been in an era of very low interest rates and the message we get from bond yields is until recently the valuation of equities in the US was quite reasonable - they have not been overvalued for the whole period since the 1970s.
"One of the reasons the market has risen so much is that we have moved from a world of rapid inflation and moderate inflation to a world of price stability. Equity and bond markets hate rapid inflation, they do not mind moderate levels but they love price stability."
In the period between 1871 and 1998, US equities saw average real returns of 17.5% during times of price stability but saw an average fall of 3.3% during periods of high inflation, according to Schroders. The economic cycle is also crucial to stock markets and Gasparro said the US is currently experiencing strengthening growth and tighter monetary conditions.
He added: "The bulk of the evidence says the US economy continues to grow at a robust pace of 4-5%. We could be near a turning point but it is a brave person who calls that turning point in the US.
"We also believe there is further to go in the UK and Europe than in the US in terms of the corporate earnings recovery. Although, if interest rates go up that is bad news for equities and we see interest rates rising in the US, Europe and the UK.
"A soft landing for the US is our central case and this means growth going down to 1% to 2%. I do not think it would mean growth will go down to zero or below. I would say the trough in growth for the US would look something like 1.5%.
"The Federal Reserve has been more or less up with events and we are looking for around 75 basis points in interest rate rises before the presidential election in the autumn."
Gasparro said while the group is underweight US equities it is keen on Japan especially if growth continues. The group is also overweight in emerging markets which it favours to be among the chief beneficiaries of the current levels of world growth.
Gasparro said he does not see the technology revolution creating a new era which will allow economies to grow much faster than they have done historically.
He said: "My belief is there has been 100 years of productivity growth from technology which has meant that economic growth has been 2% to 2.5% a year.
"If you take the long view of technology spending there has been an acceleration of this process which means that the advantages of technological progress and spending have been compressed into a relatively short time period. This means that economies can grow at 3% rather than 2% to 2.5%.
"What is dangerous is to say it is all different now and that economies such as the US can continue to grow at a rate of 4% to 5%."