Equity markets around the world are nearing the end of a one-off period of abnormal returns, and investors need to start looking for different ways of investing in order to maintain returns, says Chad Padowitz, chief investment officer at international equities manager Wingate Asset Management.
“Over the last three or four years, markets have performed well and shares, bonds, property have all delivered strong returns for investors.
“But as interest rates scrape along the bottom, with up the only way left to go, as well as anaemic global growth, equity markets and other asset classes will start to struggle.
“While very long term statistics show that international markets return an average of 8 to 10 percent return a year, the reality is that the world doesn’t deliver that every year – it can be a wild and risky ride to achieve that average.
“If the index gives nothing for the next three years – or even a negative return – investors and their advisers will need to think a bit differently. And once you normalise profit margins and valuations to long term averages then that is not an unreasonable possibility,” Mr Padowitz says.
He said that a combination of lower capital return and higher volatility will be the main challenges for investors over the medium term.
“Extraordinarily low interest rates have supported markets over the last few years, while a focus on quantitative easing (QE) has kept liquidity high.
“But as a result of this, both valuations and company profit margins are now at the upper end of the historic ranges, which doesn’t bode well for future returns.
“We are already seeing a shift to a more volatile environment, while divergence in regional monetary policies is introducing uncertainty for investors. The European Central Bank introduced its QE program earlier this year, and the Bank of Japan is beefing up its program, but in the US, the Federal Reserve is looking to increase interest rates and has stopped QE.
“We expect markets to struggle to continue achieving recent levels of return. Few economies are growing by more than two percent, and our view is that company earnings growth will be lower over the next 12 months, and share price appreciation a lot harder to come by.
“An important consideration for investors will be: how can they shield themselves from mounting risk in a softer market, while still taking advantage of growth potential of international markets?
“Consideration should be given to sources of return linked to income and volatility as opposed to merely capital growth.
“A diversification of sources of return will in most, if not all, instances provide a lower risk and higher probability of a better return.
“The riskiest view would be to extrapolate the last five years returns as an expectation of the future,” Mr Padowitz said.
Source: Wingate Asset Management
