Some of the assumptions around equity market returns in the year ahead remain “too optimistic”, and are preventing investors from re-entering the asset class, according to Chris Iggo, CIO of Axa Investment Management’s Core unit.
Iggo said sentiment in markets generally remains weak right now, with the recent OPEC decision to cut oil production, which would be expected to push oil prices higher, has added to investor concerns around monetary policy and geo-politics.
He says that higher bond yields may have increased the appeal of that asset class, as it restores the traditional inverse correlation between bonds and equities.
But Iggo said it was a different story when it comes to equities. “In the short-term, the hope among investors is that central banks will soon conclude that enough has been done in terms of monetary tightening.
"Expectations of a pivot were premature in July. Today, it is likely to be a combination of falling inflation, much weaker economic data and increased financial instability that eventually causes a pivot in the monetary policy cycle. Importantly, central bankers have resisted the idea that they are close to the end in the fight against inflation.“
He added: “GDP forecasts have already been slashed but seeing slower growth in actual numbers would be the realisation that equity markets need to take their earnings growth expectations down a lot further. They appear to remain too high. For example, the consensus earnings per share (EPS) growth forecasts for the MSCI world equity universe remains at 6.5 per cent to 7 per cent for the next 12 months.
"This is below average, but not at recessionary levels. Paradoxically, a data-slowdown generated downward revision to earnings might help equities find a bottom. An S&P500 in the low 3000s would be one I reckon."
david.thorpe@ft.com
