Equitymarkets will not be the place to seek double digit returns for at least three years as they seek to redress the excesses of the 90s and overcome some of the fear inherent in the sector.
This may sound like a grim prognosis of the future, but more accurately it indicates the reality that has resulted in the downturn of the global equities markets in the last three years, according to Deutsche Private Banking head of investment research Tom Murphy.
Murphy says equities have been through a decade where the fundamentals have been ignored not just by retail investors, who may not have understood the big picture, but even by the likes of institutional investors.
“Everyone is busily pointing fingers at each other, but we can all see the boom and bust was driven by high levels of greed and markets have still not corrected the excesses of the late 90s. In turn, this will affect markets for some years to come,” Murphy says.
He maintains there will continue to be a long term fearful outlook in equities, but says investors will not get the degree of losses that have marred portfolios in the last 12 months.
Yet at the same time, expectations of returns should be kept modest, even when the market bounces back. Murphy says double digit returns are a bit further away than just around the corner.
One of the main reasons for this is that productivity levels in the US are still below those of the 90s and Murphy claims that much of the creative effort in the US has been replaced with fear and defensiveness.
“There is now a much greater focus on security than in the past which has been in existence for some time, despite current tensions regarding a war in Iraq, which has drawn away interest in moving ahead,” Murphy says.
“Western economies have a fear of the future, which includes a change in the market about the role of the US in the future, where many see it as large, but with its strength diminished.”
Murphy says these factors have already caused a shift that has seen the current weaknesses of equities increase the emphasis on yield within those investments, which has in turn caused the purchase of equities for only short durations.
This is a shift from equity purchasing in the past, which was dictated by seeking those stocks that were held for longer durations with an attendant long-term yield.
“The issue with buying equities with returns in the short term is that it avoids the issue of investing in potentially long-term stocks, and starves the market of capital, which in turn is being diverted to investments such as bonds and property.”
But Murphy says these sectors should also be closely watched as movement in them will indicate the first real signs of a comeback in the equities markets.
“An increase in long-term bond yields is an indicator [of a recovery] because when 10 year bonds spike there is usually a pick up in economic activity. But it should be remembered that bond markets in the US are only just starting to fall,” Murphy says.
