Additionally, electoral forces are pushing governments to retreat from austerity towards more stimulating fiscal policies, suggesting that a recession is still some way off. The latest Purchasing Managers’ Index (PMI) data from the US and the eurozone supports this view, and business-cycle indicators at Pictet also signal economic resilience.
That being the case, there could be a number of years of earnings growth ahead of us to the benefit of the equity investor. Europe, including the UK, has particularly attractive prospects in this area as it is roughly two to three years behind the US on the recovery path.
Analysis suggests the equity risk premium – the extra return received from investing in equities over the risk-free rate – is above its historical average.
If bonds remain expensive and continue to offer negative real returns, investors who seek positive real returns will increasingly have to look towards equities to provide that growth. And that will mean accepting the perceived increase in risk for doing so.
Andrew Cole is a multi-asset manager at Pictet Asset Management