With asset classes trading at record heights and real interest rates at levels not seen for decades, investors are “dancing in the dark” as markets are not providing the signals they should.
Garth Rossler, chief investment officer at Maple-Brown Abbott Limited, said much of the current “rosy” investment environment of stockmarkets trading at or around all-time highs was driven by loose monetary conditions supported by strong fiscal stimulus.
But, he said: “Real interest rates are at levels not seen for decades – a combination of a surge in inflation and the impact of quantitative easing on nominal interest rates.
“Returns have been strong, but the question remains as to whether market strength has been built on a foundation of sand.
“Real rates should rebound as some of the temporary supply factors impacting inflation reverse…, and as nominal interest rates begin to normalise.”
However, in Rossler’s view, investors were seeing this issue as ‘tomorrow’s problem’ which was causing asset bubbles across many asset classes and an extreme divergence in equities valuations.
This was because low interest rates provided “great support” to sectors of the market with long-dated earnings, even more so for parts of the market with little or no earnings which included many tech names, he said.
“With rates so low, investors in this part of the market are very happy to forgo income from their investments in hope of a substantial future payoff,” said Rossler.
“We may well see a replay of the early 2000s when investment in tech waned after the Tech Bubble burst and stock prices plunged, while commodity markets boomed as demand (spurred on by China in that instance) overwhelmed supply.”
Noting a Bloomberg News interview with Chevron chief executive Mike Wirth, Rossler explained the confused price signals were also occurring in the energy sector as demand continued to outstrip supply.
“It is interesting to contrast the valuation impact of price signals being communicated by exceptionally low interest rates to price signals in energy and commodity markets,” said Rossler.
In the interview, Wirth said although commodities markets were soaring, “signalling we could invest more”, equity prices were sending boardrooms a different sign.
“There are two signals I’m looking for and I’m only seeing one of them [right now],” said Wirth.
Rossler said Maple-Brown Abbott were contrarian investors attracted to the opportunities offered in the commodities space, such as the energy sector, “as pricing signals are largely ignored and the market continues its focus on beneficiaries of low interest rates”.
