US market rout not over: Bevin

He reckons there’s a real possibility of a double-dip recession in the US.

He also thinks it’s quite likely the US Federal Reserve will cut its key interest rate again this year, even though it currently stands at a 40-year low at 1.75%.

The current downturn in equities markets is being compared with the 1930s and with the stagnation in the Japanese market over the last decade.

"It’s a large scale event, a massive deflation of expectations build up over two decades," Bevin says.

"We think with an event of this magnitude, the excesses will take some time to work themselves out of the system," he says.

So far, we’ve seen corporate excesses coming to light and damage to the capitalist model with investors questioning the morality of the people running large corporations in the US and we’re going to get the economic impact of the decline in wealth.

"The recovery could peter out and turn into a slowdown."

Some people entering the market at the moment are hoping investor psychology will turn around and that price-to-earnings multiples will start rising again. Bevin says some stocks are still trading at 20 or 30 times earnings which is very high historically.

Nevertheless, he thinks the worst is over, provided we avoid a global recession.

Looking forward, it’s likely returns from equities will be much lower than in the past with the most pessimistic forecasters predicting only 4% to 5%, less than bond returns, and the most optimistic predicting up to 4% above bond yields. That compares with historical equities returns of between 5% and 6% above bond yields.

But the traditional volatility, which historically has resulted in negative returns from equities one year in four, is likely to continue, Bevin says.

These factors are likely to focus attention on what value active managers can add and to put pressure on the industry to reduce their profit margins, he says.

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