Schroders’ Income duo has warned central bankers will not move to prevent a valuation boom in markets and will continue to drive share prices to crisis point through easy monetary policy.
Kevin Murphy, who co-manages the group’s £1.2bn Income fund and £355m Recovery fund with Nick Kirrage, said stockmarkets now stand at a price to earnings ratio of 18x - just 10 per cent below the level at which former Federal Reserve chairman Alan Greenspan tried to cool markets ahead of the tech crash.
The manager said he thought it was unlikely central bankers would step in to temper markets as Mr Greenspan had tried to do in 1996 when he asked ‘how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?’
“What the then chairman of the US Federal Reserve was essentially trying to do was to stop the boom – a brave thing to attempt since, if he had been successful, the identity of the executioner would have been known,” Mr Murphy said.
“Some 17 years on from Greenspan’s speech, the equity market stands on a p/e of 18x – in other words we are just 10 per cent away from once again hitting levels Greenspan thought were irrationally exuberant – so can we expect to hear from a would-be executioner any time soon?
“We are not holding our breath.”
Mr Murphy said instead of controlling the boom, central banker rhetoric of recent years had only served to fan the flames.
“Far from stopping the boom, in recent years, all the rhetoric – most famously, European Central Bank president Mario Draghi’s ‘whatever it takes’ speech – and the actions of the world’s central bankers and politicians have served to fuel it, as the huge injections of liquidity into the global system seen from, for instance, the US and Japan find their way into financial markets,” he said.
The manager noted the end of the boom Mr Greenspan was trying to stop did not occur for another three years after his speech but that did not mean investors should not be cautious of markets at their present levels.
“We are now in an environment where investors should be very cautious indeed about what is going on across all financial markets,” he said.
