Part 5 : unreasonable equity markets?
We believe that the backdrop for equity markets remains favourable. Despite earnings outlooks being revised significantly downwards, falling interest rates mean that the return on equities remains high. Furthermore, the spate of downward revisions is now behind us.
In the short term, attention should be paid to the following risks: weaker economic data (following an extraordinary recovery period); the lack of agreement over a new support package in the United States (the economy may stall); a no-deal Brexit; the US presidential elections (risk of a close election and disputed results); and Sino–US tensions.
However, in the medium term, we believe that equity markets have greater upward potential than other asset classes. Compared with bonds, where central bank action is putting pressure on yields, the return on equities seems more reasonable. Furthermore, the prospect of a vaccine could revitalise the economy and by extension the markets, amid strong fiscal stimulus.
While equity markets are currently trading at high levels, they are coherent with the backdrop of strong fiscal and monetary stimulus and persistently low interest rates. While rising prices would push central banks to raise interest rates, potentially upsetting the current equilibrium, such a scenario is distant. The scale of the measures currently being taken makes central bank rate rises a potential scenario only likely to unfold in the years to come.
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The opinion expressed above is dated September 2020 and is liable to change. Latest available data is used.
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