Investors in equity markets could receive nominal or even zero returns over the next ten years unless they buck market trends and seek out their own opportunities, according to Wingate Asset Management chief investment officer Chad Padowitz.
“In our view, equity markets are currently the most expensive they’ve been in decades. This is being driven by companies that have dividend policies that offer a proxy for bonds, forcing global equities indices to levels that we think are unsustainably high,” Mr Padowitz said.
Accordingly, Mr Padowitz said there are opportunities for savvy investors looking for value in the market, rather than bond substitutes.
“As bond yields fall, a number of investors are flocking to stocks that they see as a proxy for bonds – that is, buying shares in companies that they believe deliver solid dividends – and they are doing so by selling out of other sectors. This creates good opportunities for those investors that don’t want to follow the herd,” he said.
Many of those equity investors are favouring long duration, low volatility assets including consumer staples, telecommunications, infrastructure and utilities sectors, creating opportunities elsewhere.
“These companies are subsequently trading at substantially higher valuations than would usually be the case. At the same time, there are other sectors that are very cheap, and these are the opportunities that we are currently focused on, looking at shorter durations, lower P/E multiples and higher free cash flow yield.”
Mr Padowitz said the US equity market may prove particularly advantageous for investors.
“We see most opportunity at the moment in US financials, which are trading at their cheapest valuations relative to the market in around 90 years, especially compared to book value,” he said.
“There are also good opportunities in certain segments of healthcare in the US. It’s usually an attractively priced sector in this kind of economic environments but this isn’t happening at the moment. The election cycle has thrown up some negative sentiment but we think that valuations will revert upwards.”
“Other sectors with good potential include capital equipment, energy and commodities.
“These sectors will benefit from rising interest rates, at the expense of those who benefit from falling rates.”