Investors shouldn’t be lulled into a false sense of security after a stellar 2019, according to Schroders head of multi-asset Simon Doyle. Rather, there is enough danger in the economy to suggest that a trigger could create an earnings collapse across the globe.
“If you take a really simple view of this, it’s a giant ponzi scheme,” Doyle remarked at a recent media event in Sydney.
The man responsible for launching Schroders’ successful Real Return (CPI+5%) Fund explained that central banks have inflated asset prices by cutting rates to zero, which has distorted income levels and put the economy in a vulnerable position.
“Previously we were in an environment where we had lower value assets and higher yields,” Doyle said. “Now we have incredibly low yields and elevated asset prices so there’s not a lot of income. You’ve got capital values that are supported by low interest rates and that’s across the curve; it’s infrastructure, it’s private debt, it’s real estate.”
The problem with the economy continuing in this direction, he continued, is that no one’s quite sure how to change course.
“What if something breaks? What if we get a recession? We’ve gotten away with it so far because growth has been enough to sort of paper over the cracks, but if you get a recession and earnings collapse, I think the basis of that support is going to disappear,” Doyle continued.
Doyle did note that markets will continue to be supported as long as interest rates remain low – which should be for some time. Policy makers and central bankers are not yet ready to “withdraw or materially temper their support,” he added.
He also noted that some of the best years for investors come very late in the investment cycle.
Concern remains, however, that an economic shock in some form could expose the lack of fundamental strength in the global system.
“Long story short… how long does this run and how is it sustained?” Doyle asks. “And how does it end without a major disaster for the global economy?”
