“Just think how profitability has been driven in certain sectors in the US. American companies have leveraged up their balance sheets and have done stock purchases to improve profitability,” said Thomas Gerhardt, head of EM equities at Edmond de Rothschild. “That would make me think a bit before increasing my exposure.”
As Gerhardt’s bread and butter comes from investing in emerging markets, it’s perhaps of little surprise he is sceptical about rival asset classes. Dominic Byrne, manager of the Standard Life Investments Global Equity Fund, shared the German’s assessment however, and even went a step further.
“Overall, valuations are tough from a headline point of view,” he said. “Equities are probably somewhere above mid-cycle valuations.” The third speaker on the panel, Stephanie Butcher from Invesco, is a European equity manager. Across Europe, this asset class is considerably more popular than US equities. So could she provide a more upbeat outlook? Not quite. “Our problem [as European equity managers] is that we always end up being a high beta proxy of US equities,” she said.
But still better than bonds, right?
Equities may indeed look expensive, but it all depends on your perspective. After all, there are always assets to find that look even less compelling. “The implied cost of equity versus the implied cost of credit is the [only] metric where equities are still cheap,” said SLI’s Byrne. “Equities look significantly cheaper than credit markets.”
Logically, the part of the equity market that looks least attractive at the moment is bond-like stocks, so Byrne. “I’m a bottom-up stock picker so I don’t tend to have strong macro views, but what I wouldn’t do now is chasing equities that look like bond proxies, such as large cap US staples. Valuations there look extremely stretched,” he said.
Butcher agreed: “What I wouldn’t do is chasing equities that look like bond proxies.” German fund buyers attending the forum seemed to agree with the fund managers on this point at least, expressing a strong preference for value over (quality) growth stocks for both US and European equities (see chart above).
Click here to see a full overview of delegate voting results from Expert Investor Germany.
And here you can see a selection of photos taken during the event.