Conditions will become tougher for equities in the medium to long run as key supports of recent years are starting to erode, according to Luca Paolini, chief strategist at Pictet Asset Management.
He said the global economic growth is plateauing and the era of loose monetary policy is coming to an end.
Meanwhile, the corporate profit margins are peaking and stocks’ earnings multiples look stretched.
Within equities, emerging markets (EM) will be a brighter spot, with a particularly strong showing expected from Asia, Paolini said, adding that he expects an annualised return of 10% in dollar terms over the next five years.
Stocks in the EM region trade at a reasonable 12.2x price-earnings (P/E), he said in Pictet AM’s latest outlook report.
EM equities also have superior earnings growth and benefit from a favourable sector composition. The tech industry, for example, accounts for 38% of the market, which is double the global average.
What’s more, EM technology stocks are expected to deliver yearly returns that are more than double those of their US counterparts over the next five years.
EM technology stocks are expected to yield annual returns of 14.5%, compared with US technology stocks of 7%.
Silicon Valley’s dominance of global tech is facing challenges from emerging markets as countries through Asia, Latin America and beyond have opened themselves to the possibility of creating home-grown, value-added products and services, Paolini said.
Investors who willing to tolerate risk should be able to generate acceptable returns over the medium term by complementing their investments in mainstream assets – such as developed-economy bonds and equities – with those from off the beaten track, such as EMs and gold.
The default portfolio split evenly between the developed market stocks and bonds will no longer be able to deliver real returns most investors need.
Trade tensions, however, will continue to affect investors sentiments in equities in the short to medium term. The Straits Times Index (STI) ended 0.38% lower to close at 3,287.4 last Friday, taking the year-to-date performance to -3.39%. The Nikkei 225, meanwhile, also shed 0.78% to 22,516.83 at its close last Friday.
Private equity gathers strength
Meanwhile, private equity markets are also expected to attract more investments from public equities.
Onerous regulation, the rise of passive investment and shareholder short-termism have all dissuaded companies from public listings, according to Paolini.
‘If the shift from public to private equity gathers strength in the next several years, equity investing is bound to become more complex and expensive,’ he said.
Supriya Menon, senior multi asset strategist at Pictet Asset Management, told Citywire Asia that investors previously would have been able to gain a full equity return by merely investing in a diversified portfolio of large companies in the stock markets.
However, now one will need to add venture capital or PE to your public equity portfolio, she said.
‘From a long-term perspective, Shiller PE for global equities do look expensive, and we assume almost all markets experience de-rating over a five-year horizon,’ Menon said.
However, private equity is also expensive on a price/earnings before interest, tax, depreciation and amortization basis relative to long term average, she added.