Tuesday, December 1, 2015

1/12/15: Markets at a Lower Edge of Growth

During a number of recent financial conferences that I had an honour of contributing to, the repeated leitmotif of Q&As with the audiences has been: "Where's the value in today's markets?" This is hardly surprising, given the state of prime sovereign fixed income and equities markets (both overbought), corporate fixed income markets (closer to fair valuation, but with elevated spreads and volatility), and commodities markets (depressed by long running fundamentals of demand and supply). Short of investing in 17th century furniture futures or philately options, any investor today will be hard pressed to find a broader theme for a buy-and-hold allocation.

Now, the same anecdotal evidence is confirmed by the Morgan Stanley analysts:

Source: Bloomberg

So equities/fixed income allocations for traditionally structured neutral portfolio have converged in returns for both the U.S. and European markets and at levels not worth taking a punt at. Meanwhile, risk-adjusted returns have all but evaporated:

 Source: Bloomberg

A handful of quotes (all via Bloomberg):

"What is notable for 2016 is that, unlike past years, both our long- and short-term forecasts point to muted equity upside.”

"Having been positive on developed market equities in recent years, it is notable that all of our regional index targets now imply little upside for stocks in 2016. Morgan Stanley’s economists forecast that global GDP growth will nudge slightly higher next year (to 3.3 percent from 3.1 percent in 2015), but our regional earnings forecasts suggest companies are having a tougher time turning modest economic growth into decent profit growth."

"The flatness of the [efficiency] frontier means that the optimal portfolio will lie near the left-hand extreme of the red line for a variety of investor utility functions. Relative to prior later-cycle periods, growth looks weaker, central bank policy looks looser, and credit risk premiums are more elevated."

In summary, then: there is no story of growth and with this, there is no story of financial returns uplift. 

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