Good returns might be ‘hard to find’
Good financial returns might be hard to find over the long-term, given intensified trade tensions and disappointment with interest rate cuts, according to Principal Global Investors’ chief global economist, Bob Baur.
In addition to this, there was a number of signs indicating that US business leaders lacked confidence as US corporate profits and total earnings had been broadly flat since 2016 reflecting a surge in interest costs, rising wage pressures and a failure of revenues to match.
Baur stressed that flat or contracting profits were one of three typical-leading signs that a recession may be “out there somewhere in the future”.
“The bigger picture is that the lack of growth suggests the US may be later in its business cycle than some have thought,” Baur said.
“We don’t think recession is a worry or this year, nor is it likely next, as these harbingers have a long lead time. But they do herald that the end-cycle is coming.”
At the same time, the data and market indicators suggested that the end of Asian downturn was nearing despite the heightened trade tensions and ongoing uncertainty caused by Trump’s tariffs.
However, the lack of long-term trends or passive indicies for investors to jump aboard might continue to herald the difficulties around finding good returns in a longer perspective, Baur warned.
Baur said a bit more inflation coupled with higher long-term interest rates could create a challenging environment for investors after 2020 which, in turn, could bring significant distress in the corporate bond market with prospects of rising defaults.
“If this milieu comes to pass, good financial returns will be very hard to find. Most financial assets, especially safe-haven government bonds, have very high valuations today, and they are unlikely to become much cheaper into mid-2020,” Baur said.
“Neither stocks nor corporate bonds will like the environment that could coalesce in 2021, if a bit of inflation returns with higher long-term interest rates.
“If the worst comes to pass in 2021, cash and safe-haven US or Japanese government bonds would eb the place to ride out the lurch. Eventually, this could bring a big rotation to value stocks and real assets.”
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