Shares should remain attractive relative to fixed income over the next 10 years despite all asset classes entering the 2020s at valuation highs, Harbour Asset Management suggests.
Harbour says in a just-published note that markets launched into 2020 at an “unfavourable starting point” for asset prices.
“For investors, the next decade is made especially difficult because no asset class currently appears cheap. Fixed income markets are particularly unappealing with interest rates close to historic lows and credit spreads tight,” Harbour says.
“Equities have a slightly less challenging outlook, with price-to-earnings multiples not extreme and equity risk premia (the additional return equities offer over fixed income) still healthy despite most markets trading at or close to historic highs.”
The asset class forecast sits ninth on the Harbour top 10 list of ‘risks and opportunities’ facing investors in the coming decade, which mostly highlight global mega-trends such as the growing middle class in Asia, increasing healthcare spending, the aging population and technological advances.
Rising inequality and the threat of ‘deglobalisation’ posed by populist movements the world over are also likely to persist in the next 10 years, according to the fund manager, with some worrying trends already evident.
Governments may struggle to keep up with the multiple global challenges but that won’t stop them trying as new regulations continue to pile up on the statute books.
“The rapid pace of technological development will place increasing demand on global regulators and businesses over the coming decade,” the note says. “NZ businesses, for example, cite regulation and paperwork as the most important problem they face.”
However, Harbour says the extra red tape also brings with it “implementation and enforcement” issues.
Environmental, social and governance (ESG) and climate change become evermore critical for investors over the 2020s, the note says, while evolving further.
“The next decade should see improvements in technology and transparency providing investors with better data on which to base sustainable investment decisions,” the article says.
Finally, in a nod to the limits of forecasting, Harbour says the following 10 years will feature plenty of ‘unknown unknowns’ that could throw all predictions off course.
“Each of the risks we have identified not only has implications for share markets, be it for specific geographies and sectors, but also for another key driver of market returns, the direction of interest rate policy,” the note says. “With the returns of the next decade likely to be harder fought than the returns of the preceding one, we believe these risks should be at the forefront of the decision-making process of long-term investors.”
Harbour, headed by Andrew Bascand, has about $5 billion in funds under management across equities and fixed income.