There are three economic trends that have OFI Global Asset Management portfolio manager John Delano feeling quite upbeat about equity markets.
Delano said the end of “suppressive” regulatory regimes in the US and Europe, the normalisation of global monetary policy, and a return to relatively synchronised global growth all point to a positive outlook.
“I am optimistic about what the future can hold for equities, and I won’t couch it only in the long term, as I think [these three] things happening today throughout the world portend positive developments,” he said.
He explained that under president Barack Obama’s administration 20,000 new regulations had been approved and said President Trump’s administration “could bring this down by 90 per cent”.
Delano said that in recent meetings with companies, he and his team have observed that being freed from an overly burdensome load of regulatory compliance was creating opportunities for boards and management to focus on growth plans.
“We sit there in meetings and [businesses] say, ‘Well instead of worrying about how we are going to deal with this new rule for workplace situations or transportation or what have you, we can think about how do we invest to grow our businesses’…So I think we’ll start to see this flowing through as an uptick in capital expenditures and a willingness to invest in projects to move growth going forward.”
Delano also noted a movement toward de-regulation in Europe, particularly in France since the election of President Emmanuel Macron. He predicted the trend would help boost economic growth and lead to an improvement in average earnings per share.
“That new freedom, I think, is very important for everyone to understand.”
He said that after nearly a decade of focus on tightening regulatory regimes in the wake of the collapse of US investment bank Lehman Brothers and the ensuing global financial crisis, the tide has now turned and confidence in bank capital standards is returning.
This is critical in the context of the normalisation of global monetary policy, led by the US Federal Reserve, he said.
“An increase in people’s belief in the banking system takes away some of the systemic risk that people worry about with that, so you’re not thinking what is the next one to fail.”
Another reason Delano has a positive outlook on equity markets is because he thinks valuations are generally OK in the context of an improving macroeconomic backdrop.
“For the first time in a decade, we’ve had what looks like a synchronised acceleration in growth.”
He said that while many argue average valuations are stretched, an ability to justify high valuations “seemed to be coming through” from a stronger growth environment. Delano also tipped an uptick in the appetite of corporations to take on new debt to invest in growth plans.
“What I can see is a stronger growth environment with low inflation, with central banks wanting to move to more normalised levels so they have a kind of cushion in case something does go wrong again, better growth and better earnings, which translates into positive equity returns.”
Equities are particularly attractive in comparison to the low yields available in fixed income markets, he said.
Delano made his comments at the 2017 Conexus Financial Equities Summit. OFI Global Asset Management is a New York-based investments house with US$246 billion ($324.2 billion) in funds under management.
Conexus Financial is the publisher of Investment Magazine, top1000funds, and Professional Planner. For details on upcoming events visit conexusfinancial.com.au/events.