Something from Société Générale’s Dylan Grice (and something of a reply to his SocGen colleague Albert Edwards), who recently indulged in the “mugs game” of forecasting capital gains in world equity markets, to start the week.
In his own words, the outlook is distinctly underwhelming:
In other words, equity investors had better beware.
Yet, however dismal the outlook for the developed world, in terms of long-term forecasts, Grice reckons it is still better than that for the data-poor Brics –- provided of course that QE2 doesn’t hit the buffers and see those liquidity flows trickle out, as per Edwards’ expectation.
The following charts show the results of a similar exercise for the UK, France, Germany and Japan. Below, I’ve plotted cyclically adjusted PE ratios (CAPE’s) with their inflation-adjusted 6- 7% equivalents and compare them to the 10y naïve forecast returns. Of them all, France and Germany look best. Clearly these countries have problems, such as having … er … fiscally challenged governments and being part of an … uhm … troubled currency system … but at least you’re getting some sort of compensation for the risks being taken …
Now take a look at projections for the Brics:
Bubble, anyone? As Grice cautions:
Just to emphasize, I’m not sure how much weight I’d place on these estimates and I wasn’t sure if I should include them but then I thought, who really cares? When the wind is blustering in our faces and we can’t hear ourselves speak, it can only mean one thing: the deafening roar overhead of helicopter Ben dropping his manna from heaven! What could possibly go wrong?
What, indeed?
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Update:
From BNY Mellon today (emphasis ours):
If Europe appears an unattractive prospect then it is equally hard to believe that China or others will be particularly keen to leave all of their new reserves in the US given the FOMC’s current stance. Moreover, although they may be willing to increase their exposure to Japan or the UK (or Australia or Canada) relative to either the USD or EUR (something we consider likely), these markets are simply not large enough to take all the fresh money being generated. As a result it seems to us that one possible outcome of this latest round of events is a sharp surge of money into emerging market sovereign debt (along with, of course, the inevitable fresh surge of money into gold). Indeed there is plenty of evidence that this process has already been underway for at least the past month. South Korea, for example reported last week that October had seen the largest net purchase (KRW 4.3 Trn) of South Korean bonds by foreign investors in twelve months. Tellingly around 10% of all these were bought by Chinese investors(who had bought a not dissimilar amount in September). The net outcome of all this is that the forces driving emerging market currencies, bond markets and equities, seem set to intensify in the weeks ahead. However, it would be remiss of us not to also note that this seems eerily reminiscent of the final months of the dot.com boom of a little over ten years ago. In particular, it is difficult not to recall how investor interest in stocks in the January, February and early March of 2000 became ever more narrowly focused on the TMT sector while more traditional stocks rapidly fell from favour. Could it be that emerging market sovereign debt/currencies are today’s equivalent of TMT stocks a decade ago? If so then one of our tasks in the coming months is to work out which emerging market is the equivalent of Apple (up 3000% in a decade) and which compares to Pets.com.
Answers, please.
Related links:
The liquidity and momentum trade de rigueur – FT Alphaville
Dylan Grice vs Emerging Markets - FT Alphaville