GLOBAL EQUITY MARKET OUTLOOK; A LOST DECADE IN PROSPECT

This is the summary from the JPS Strategy initiation published on 5th January 2021 and picked up by John Authers in his brilliant Bloomberg Newsletter on 10th January. For a copy of the full report, please E-mail jp@jpsstrategy.com

The major global developed equity markets, led by the US, face the prospect of a long period of sub-par returns similar to that experienced by emerging market equites after 2008, due to a combination of sluggish economic growth, tighter liquidity, elevated valuations in key sectors, increasing geopolitical tensions and a shift by governments towards policies which favour political and social objectives at the expense of capital. Japan is likely to be the most defensive of the major markets, while there are currently no obvious candidates within the emerging equity universe which combine a compelling secular narrative with attractive valuations.

The very easy monetary policies of the European and US central banks are no longer politically sustainable, having exacerbated existing social imbalances via surging asset prices (especially property) and contributed to the rise in inflation, paving the way for tax increases to deal with government debt and then to address inequality as the political pendulum swings leftwards.

However, monetary tightening is likely to be relatively modest given structural challenges to the European economies around the green transition and in China, where the old capital-intensive growth model has run out of steam. The bullish consensus states that China is transitioning towards an economy driven by domestic consumption, but a more likely scenario is that the massive internal imbalances lead to a prolonged growth slowdown or even a financial crisis. The US economy is relatively well placed but is not insulated from the troubles elsewhere, while the corporate sector is likely to face increasing political and regulatory pressures later in the decade.

The conventional wisdom that the present raging equity bull market in the US will be ended by much higher bond yields will probably be wrong; downgrades to corporate earnings forecasts are more likely to be the catalyst for a major correction, while liquidity will also be somewhat tighter, with increasing numbers of companies raising cash and a practically unlimited supply of new crypto assets. Together with the current high valuations and record levels of participation by mainly momentum driven retail investors, these factors suggest that investors should get the opportunity to commit money to equities at levels considerably below those prevailing today.

Equity investors should jettison the buy and hold index-based strategies which have worked so well since 2009 and focus on wealth preservation, either through actively managed funds with flexible mandates or by pursuing their own more opportunistic contrarian strategies.