Looking forward: equity investors could do well, but fixed income markets not so well
INVESTMENT INDUSTRY INSIGHTS |
The next twelve months are expected to be pleasant for equity investors and unpleasant for fixed-income investors, Omega Advisors' Vice Chairman Steven Einhorn predicts. At RSM's 5th Annual Investment Industry Summit which took place Wednesday, Sept. 18 at Convene, Midtown West in New York City, Einhorn delivered the keynote address titled "The Outlook for the U.S. Economy and Stock Market.” Einhorn offered three conclusions: 1) shares of U.S. equities should generate a high single-digit rate of return over the coming 12 months; 2) fixed-income instruments should be both unappealing and uninteresting, and 3) in addition to the U.S., European and Japanese equity markets should also do well.
U.S. Equities Eyed For High Single-Digit Rate of Return
Einhorn offered seven reasons, which he called the Magnificent Seven: why U.S. equities should provide a high single-digit return over the coming year. First, Einhorn noted that the U.S. economy is in a long-lasting and self-sustaining expansion since every cyclical sector of the economy is below its respective long-term trend, indicating significant pent-up demand. As this pent-up demand is activated, it should contribute to sustained economic growth. Further, employment and income growth is improving, as is bank lending. Second, Einhorn noted that it is not only the U.S. which is in the midst of an economic recovery, but that the Euro zone has now exited recession and Japan growth is accelerating based on the policies of Prime Minister Abe and the Bank of Japan. The global economy is in synchronized expansion, an important underpinning to higher share prices. Third, the Federal Reserve is very accommodating in its policy and this should continue for some time. The Federal Reserve’s balance sheet should continue to grow for the next nine to twelve months, injecting liquidity into the U.S. equity market, and the target Federal Funds rate should remain at zero for an extended period of time. Fourth, in addition to a friendly U.S. central bank, virtually every other central bank is also very friendly in its policy. Just as global economic expansion is a synchronized one, global monetary accommodation is also synchronized. Fifth, Einhorn noted that the combination of a synchronized global economic expansion and a synchronized global monetary accommodation occurring simultaneously is very unusual and a very sweet combination for equity markets. Sixth, Einhorn expects investors to move out of fixed income securities and into equities. This rotation should come about because bond interest rates in the U.S. should increase over the next several years, in turn delivering negative returns for fixed income securities. Seventh, Einhorn stressed that investors should receive large amounts of cash to reinvest from good growth in dividends, share buy-backs, and merger and acquisition activity.
Fixed-Income Instruments: Unappealing and Uninteresting
Einhorn anticipates fixed-income instruments, including U.S. Treasury Securities, investment grade bonds and high-yield both in the U.S. and globally will be unappealing and uninteresting because interest rates should rise steadily over the course of the next several years as these rates are currently constrained by very easy monetary policy.
While Einhorn was bullish on his prospects for the U.S. and other developed equity markets for the next twelve months, he suggested there might be some potential risks. First, while he does not expect one, a recession would badly hurt U.S. share prices. Second, Federal Reserve exit from its quantitative easing could be difficult and add volatility to fixed-income and equity prices. Finally, Japan’s experiment in massive monetary accommodation to stimulate growth and inflation could fail, in turn, reducing the risk appetite of global investors.