An ‘ugly contest’ for equities and bonds
Global markets are awash with liquidity and the medium prospects for equities looks good when compared to bonds, according to Epoch Investment Partners chief executive Bill Priest.
Speaking at the Portfolio Construction Forum's 2013 Markets Summit, Priest said that, following the global financial crisis, the world was desperate for growth and every policy maker in the world was trying to produce it.
Referring to the Bloomberg Financial Conditions Index, he said markets have not only stabilised but are now above the historic average.
"Once debt became a Government obligation, fiscal policy options were seriously constrained — growth policies were needed but only monetary policy was left as a tool and out of that came quantitative easing (QE)," he said.
"Essentially by lowering real interest rates to zero or negative it is supposed to stimulate asset values and lower the cost of capital so that growth can take place."
Agreeing with Priest that it is yet to be seen whether QE will work, Fidelity Worldwide Investment portfolio manager Kate Howitt said investment over the last couple of years has been an ugly contest.
"Which is the least ugly investment class that you can put your investment dollar in to?" she said.
She said at the moment, however, so-called ‘liquidity dams' were distorting bond valuations so there was "little room for error and they're a big inflation risk".
"If central banks can't get growth going they'll get inflation going, and the alternative will be another recession/depression — and it's going to be pretty ugly for bonds in this," Priest said.
"Six to eight per cent (return on equities) doesn't get you excited but the outlook for bonds, pretty ugly."
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