I concede that the macro-economic outlook for Western economies is still far from certain, with housing and employment data pointing to a continuation of weak consumer activity. However on the plus side, the Fed and other central banks have shown that they are prepared through quantitative easing and low interest rates to avoid at all costs a slide back into recession so I do not buy into the double-dip scenario currently priced into US treasuries and UK gilts.
Talk of a bubble in these assets might be overdone but the key driver of the bull market for bonds over the last 20 years has been falling interest rates and they cannot fall any further. Whether it is next year or 2012, economic recovery, and with it inflation, will return and, well in advance of this, financial markets will adjust accordingly. This means that bonds are fully valued investments today at the tail-end of a long bull market.
In contrast with US treasuries and UK gilts, equities in Western markets have made no headway for 10 years and, in many sectors, valuations are incredibly cheap by any measure while corporate balance sheets are mostly in great shape and profits growth is strong. Companies that are global businesses, deriving the majority of their earnings from the still fast-growing emerging economies with strong balance sheets and a dividend, look incredibly attractive in today’s low interest rate, high bond risk environment.
They will look even more attractive when interest rates start to rise with the return of inflation that I believe will be the inevitable result of the desperate measures taken by central banks and governments to prevent a return to recession in the West.
Asian and other emerging economies continue to expand and boom. We have seen strong investment returns from emerging market equities, debt and currencies and I can only see allocations to these asset classes rising in coming years as benchmark weights adjust to reflect the greater role that these economies play in the global economy.
Equity markets are already recovering but gauging when investors will really become enthusiastic is difficult.
Sam Liddle is manager of the CF Miton global growth and global income portfolios