International equities prices raise eyebrows

Expectations for international equities have cooled slightly, a survey shows, as commentators question whether markets are overvalued.

Monday, August 25th 2014, 6:00AM

by Susan Edmunds

The latest Aon investment forecast quarterly survey, which includes the predictions of ANZ Investments, BT Fund Management, First NZ Capital, Devon Funds Management, Fisher Funds and Harbour Asset Management, showed an average expectation of an 8.4% return in international equities over the year to June 2015 and 8.2% over the next five years.

That was down from an expectation of 10.7% and 8.8% in the April survey.

There are concerns that international equities are overvalued and could be set for a correction. The S&P500 has risen 193% up on its 2009 trough and is now at record high levels. The US represents more than 50% of global market cap.

Jesse Columbo, who made front-page headlines with his Forbes prediction of a looming house price crash in New Zealand, said the S&P500 was overvalued on many metrics, including Tobin’s Q Ratio, which compares the market’s price to its replacement cost) and stock market capitalisation compared to GDP.

“Market bulls are making a mistake by assuming that stock market valuations can stay at such elevated levels forever; there will come a time when valuations revert to the mean and likely overshoot (as a result of a bear market), which will create the next generational valuation trough from which a new secular bull market can eventually rise,” he wrote recently.

But Aon investment consultant Guy Fisher said the strong returns seen over the past year in international markets could continue. 

“The past five years have seen some pretty strong returns, driven by liquidity from central banks. In some cases that’s slowing down but there’s the potential for it to come again from other sources. The Bank of Japan is still doing it and the ECB is talking about it.”

But he said that did not mean there was no risk of a downturn. “There has to be a risk that unless earnings catch up with the way prices are moving up, it corrects. But putting a timeframe on that is hard. There is some nervousness out there. There’s been a strong run since 2009 and we need to see some global economic growth to sustain that. There’s not a lot of evidence of that yet.”

John Berry, of Pathfinder Asset Management, said he did not think the US market was overvalued. “There’s a possibility that there could be a bank collapse or something totally unrelated but all things being equal, we don’t think US equities are fundamentally overvalued.”

He said the biggest fears were around changing monetary policy. He said if quantitative easing-inspired liquidity was removed, interest rates could rise dramatically and drive an equity sell-off. But he said the removal of QE would require good economic growth, which would help earnings.

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