This week’s IDB considers equity market sentiment, valuations and future expected returns. We look at key macroeconomic risks and the mixed signals coming from market indicators and conclude that a pragmatic approach is needed to navigate the current late cycle environment.
Mixed signs of overextended equity markets and investor complacency, do not necessarily mean a market correction is around the corner, however elevated valuations and lower future expected returns offer a less attractive balance of risk and reward. We should remain wary of market participants becoming too greedy and ignoring risks in the market.
The main macroeconomic risks to the equity markets come from China and Central Bank policy. Private sector total debt in China is now over 200% of GDP, which has brought growth forward, but runs the risk of storing up danger later down the line. With regards to Central Banks, policy makers are walking a tightrope to avoid the mistake of prematurely raising interest rates and reducing balance sheet support.
The changing balance of risk and reward, puts equity warning signals at amber. Attempting to time the market is too speculative, therefore London & Capital’s equity strategy will continue to taper risk as the market inflates and to take decisive action once a change in market dynamics is confirmed.