Having generally called both equity and credit markets 100 per cent right over recent months, Barclays Capital’s head of global asset allocation is now rubbing salt into the wounds of those who failed to believe (including the beleaguered H&M Capital Management).
From Tim Bond’s latest note to clients, subtitled “Easy money”:
The key risks seem skewed towards the recovery proving stronger than even we are anticipating…
The irony here is that this risk is having a normalising effect on his investment advice. Turbo-charged growth brings with it an increased risk of an early removal of Government stimulus, causing Bond to join the likes of Credit Suisse, Goldman Sachs and others by overtly saying “move from credit to equities.”
But he’s also saying that this should be balanced out with cash – and he’s going so far as to warn of the danger of asset bubbles.
The current cyclical recovery is coloured by the most sizeable financial and private non-financial de-leveraging of the entire post war period. The current interlude is also characterised by an almost unprecedented scale of central bank asset purchases. The central bank interventions serve to reinforce what is already a profound shift in the balance of supply and demand in the financial markets. The net impact has been — and is likely to continue to be — a rally in the prices of riskier assets. While these conditions are in place, the technical underpinnings for markets will remain bullish and the probability of many asset classes rallying into overvalued territory will be high. Put bluntly, if our baseline forecast for growth and policy turns out to be correct, the environment is ripe for the inflation of asset bubbles.
But before anyone tries and rebrands Bond as a bear, consider this declaration made towards the end of his note:
We are fairly agnostic on geographical diversification and do not regard any major market, developed or emerging, as notably overvalued. This observation includes Chinese and China-related markets, where valuations need to be considered in the context of the high-trend growth rate. However, for the next quarter, we would tend to overweight the US relative to Asia. This is partly due to the unique US profits outlook, discussed above, but also due to relative positions in the cycle. The US economy is just moving into the point of maximum GDP acceleration, whereas Asia is likely to decelerate from what had been a scorching rate of growth, as China reins back the frantic pace of credit creation and the impetus from regional re-stocking slows. Asian equities are not overvalued and the area’s fundamentals remain solidly positive. However, the US economy’s impressive revival and the potential upside for local corporate profits suggest that US equities might be displaying a surprising edge over the next 3-6 months. The one market we do not like is Japan, whose currency is notably expensive, where prospective policy changes are not equity-friendly and where the underlying lack of flexibility in economic structures was highlighted in the recession. We would not be long of Japanese equities.
More in the usual place.
Related links:
Learn to love the recovery - Tim Bond in the FT
Sell bonds, buy stocks, says Credit Suisse – FT Alphaville