Question: How important is the lack of available alternatives to equities in driving equity returns higher? Could an increase in interest rates draw money out of the equity markets as yields become more attractive?
Right now rates are so low that they’ll have to advance significantly before bond rates become attractive. In terms of valuations, we’re pretty much mid-cycle in my view, and there aren’t really any excesses in the system right now. Inflation is low, there’s lots of money around and valuations aren’t stretched. Mid-cycle, you tend to go through a digestion process, digesting the gains of the past five or six years. But as the economy starts to grow more quickly, you get into the earnings-driven part of the cycle, which generally lasts three or four years, until inflation and rates pick up enough to slow everything down. We have so much slack in the system right now that I believe that’s a long way away. Rates will likely be rising, effectively coming off the zero level, but they’re going to stay fairly low because I don’t expect inflation to pick up much in the next few years.
Secularly, we’re basically in a disinflationary or almost deflationary environment. A lot of that’s because of technology-led cost reductions and also labour arbitrage throughout the world. Without a lot of cost pressure you don’t get a lot of inflation. If that’s true, interest rates aren’t likely to rise very high. So, nothing really challenges the growth outlook over the next few years, other than some unforeseen geopolitical disturbance.
Right now it feels like we’re in a pretty good glide path with things picking up a little, and I think the next few years will be more of an earnings-driven market. Trimark U.S. Companies Fund is positioned accordingly. I don’t see a lot of threats to equities at this point in time. The only excess you can point to is excess caution by most investors. They haven’t been wholly invested in this market, so cash levels are too high and there’s too much money in the bond market.
Eventually, I do see an asset-mix shift back to equities, and that’s something I think will continue for the next several years.