Equities deemed still good

Strategy of Shroders funds is to go for non-US assets

KEITH Wade ( pic) is chief economist and strategist of Schroders.

He is responsible for a team of economic analysts, Schroders’ unique house view of the world economy as well as the asset allocation strategies. Based in London, he also serves as a member of Schroders’ asset allocation committee.

He commenced his investment career in 1988 when he joined Schroders as an economist for the United Kingdom market. Keith was promoted to senior economist in 1992, responsible for international economic forecasting. Prior to joining Schroders, he was a researcher at the London Business School’s Centre for Economic Forecasting.

He received his Master of Science and Bachelor of Science degree in Economics from the London School of Economics. Keith also holds an Investment Management Certificate from the United Kingdom Society of Investment Professionals.

He shares his view with BizWealth on what leg of the bull the market is in, how to watch out for signs of euphoria and what a bear market looks like.

Equity markets have done very well for nine years running now. Where do you think we are in right now in this bull market?

We are still calling a Buy on equities for 2018. I still think we can continue. We are overweight on equities in our multi-asset funds. And because of the strength of the world economy, we are seeing good earnings growth coming through. We recognise that there are a few headwinds, so it’s not quite a Goldilocks situation (not too hot and not too cold) as it was earlier this year. There are the issues of inflation, and quantitative timing.

That does make us a little bit more cautious but we still think equities are the right place to be. What we have done is we tend to focus on the non-US assets because we are concerned about the valuations in the US, so we are actually overweight in emerging markets especially in Japan. But also the cyclical nature of those markets mean that they should benefit.

The other thing is a lot of things such as stronger growth are becoming priced in. Many people are becoming optimistic. Our forecasts are positive and we may be a tad ahead of consensus, as I think everybody is moving in that direction. So that’s fine. We are not really massively disagreeing with that. But that also means that you have to keep getting the good news. People are adjusting their expecta- tions upwards.

So while we do recognise that a recovery is building up, we do realise that the market is catching up with that idea.

So while we are still positive on equities in the areas that benefit most from growth, we are thinking of perhaps buying something like gold, or slightly more defensive trades in case there is a setback or disappointment.

So we then agree that the skepticism from earlier this year has reduced, if not disappeared. People are getting more optimistic, yet we haven’t quite reached the euphoric stage, right?

Yes, that is right. We look at a lot of risk indicators and they have improved quite a lot. And because we haven’t reached the euphoric stage, perhaps there is another leg to the market. We aren’t at that level where someone says “Hey tech stocks are doing very well” and everyone’s buying into it and that creates a bubble.

So, as investors we have to be very careful, we also don’t want to be pulling out too early.

Quite honestly there are also very poor alternatives to equities right now. Cash is not attractive. All our clients want to generate a return for things such as their retirement. Bonds just won’t deliver that.

What are some of the signs of the market to show that euphoria is approaching?

I would look at two things. On the macro side, I would be very focused on inflation numbers – because that historically has always been the thing that end all things. I would focus on that and recognise that inflation will gradually be moving higher. If it moves much faster than expected (for example wages move very fast), then I will probably turn bearish.

The other thing is when bond yields start to move up, particularly in Europe.

If we did start to see bond yields moving up for whatever reason, maybe because of the quantitative timing or European Central Bank (ECB) tapering, that would start to see capital flows going into bonds. At that time, investors will say “Oh ok, bonds are starting to look more attractive, I don’t have to take so much risk anymore to get a return.”

Then you will see investments going into things like German bonds or assets where pension funds typically go into. These aren’t good signs for equity markets.

I also remember the euphoria in the late nineties. It went on for quite a long time.

The Fed chairman at that time, Alan Greenspan, said the market was showing signs of irrational exuberance. He said that in 1996. That was four years before the market peaked. So you can have quite a long run with valuations at elevated levels.

I think the thing that could really stop the bull would be to see more signs of tightening – like the ECB and Bank of Japan wanting to raise interest rates. Around the world, we need to see more rates increasing. But that doesn’t look likely at the moment. It’s much too early in the cycle to see a global monetary tightening.

What are some of the indicators you are watching now, to show that this bull is intact?

Well, we watch the emerging economies. The other thing is US President Donald Trump’s tax plan. Now I don’t think that is fully priced in yet. For example, some of the stocks that will benefit from the tax plan are not rallying very strongly. One of the risks of the market is that when people begin to price that in, you have some disappointments.

That could be another thing that could start to slow down the bull market.

How does the bear market start to happen?

While we do look at valuations, the thing with valuations is that you can have high valuations for a long period of time. That is why inflation and bond yields are so important. The reason why you’re going to get more out of equities than bonds is because bond yields are very low. So, we focus on what could undermine that.

Hence on that note, let’s talk about inflation. So you have priced in the fact that the Fed