Swimming Against The Stream
Advisers that read our market commentaries will know that for some time now we have been increasingly cautious on the outlook for equities both domestically and abroad (See mailout ‘Is a Bubble About to Burst?). As share markets have soared to record highs, investors have remained unperturbed by the fact that market valuations have also ballooned against a backdrop of negligible earnings growth. Equally they have been happy to ignore the massive global central bank stimulus that has principally driven this market appreciation, and the unsustainable current fiscal deficits in the US and elsewhere that is engineering only marginal rates of productivity growth. We have in fact witnessed the trademark collective rationalisation of a share market bubble where warnings have been discounted and tenuous key assumptions have remained unchallenged. The extreme market pricing has been justified by the fact we are in a new, unprecedented economic environment where interest rates will be lower for perpetuity and earnings growth is an eventual, convenient inevitability. And this “new normal” apparently requires a greater leniency when evaluating a share market’s worth. This flimsy justification of heightened valuations conjures memories of famed investor Sir John Templeton who once famously opined that “the four most stupid words in investing are: “this time it’s different”.