Richard Cayne Meyer International – A Bubble Forming December 2013?

Over the past five years since November 2008, the U.S. Federal Reserve initiated its QE program over which time QE has become increasingly common in the global economic landscape notes Richard Cayne Meyer.

Other developed countries have emulated QE by launching similar programs, all of which helped cut borrowing costs and supported asset prices.

In fact, in the five years since QE took off, global equities have returned more than 15% on an annualized basis, treasuries close to 5%, and US high yield credit more than 20%.

This has been a great period for investment returns, but not so great for the growth of the global economy as many investors start to question the possibility of a bubble forming explains Richard Cayne at Meyer International Bangkok.

QE has distorted financial markets and, as a result, seems to have caused investor complacency.

The one month average level of bearish sentiment, measured by the American Association of Individual Investors is at levels last seen in early 2011 and 2012. On both occasions this level represented complacency.

Stock markets seem almost indifferent to whether fundamental economic data is good or bad, as support in the form of monetary policy acts as a safety net for investors.

This government intervention is occurring worldwide. Japan’s economics minister attempted equity strategy earlier in the year, setting a two-month target return of 17% on the Nikkei 225.

On the other side of the globe, ECB President Mario Draghi’s “do what it takes policy” in the eurozone implicitly guarantees positive returns on short-dated peripheral government bonds.

It is plain to see how investor complacency may arise from this powerful backing. Yet with investment returns having seen such a significant rise in the past five years, should investors prepare for an end to this upward momentum in the equity markets?

Despite concerns, this indifferent sentiment among investors has not pushed asset valuations beyond reasonable levels and Richard Cayne Meyer believe that to be very good news for investors.

Look at prices to earnings ratios in the equity markets, and at cyclically adjusted earning yields, it does not appear we are in a bubble.  The net result is a cyclically adjusted earnings yield of 5.4%. This represents about a 10% discount to the 20-year median yield of 4.9%, showing that after a significant rally over the last five years, share valuations are fair to slightly high.  Richard Cayne Meyer explains that the important point is there is scope for earnings to drive price appreciation.

Yet, investors should not expect a repeat of the 15% annualized returns they have enjoyed over the past five years.

Annual returns are likely to halve to around 7%-8%. Equally, it is highly unlikely high yield corporate bonds will continue to produce double-digit percentage returns.

Though a bubble does not appear to be emerging, investors should be aware that returns from equities may not be as impressive in the years to come, and inflation is also a risk.

Even moderate inflation could diminish returns for medium-term investors.

Although there will always be risks and warning signs to consider when investing in equities, Richard Cayne Meyer International believes we are not in the middle of a bubble in risk assets.

Richard Cayne Meyer a native of Cote St Luc, Montreal, Quebec Canada currently resides in Bangkok Thailand and runs the Meyer Group of Companies.  Prior to which he was residing in Tokyo Japan for over 15 years and is currently CEO of Asia Wealth Group Holdings Ltd a London, UK Stock Exchange listed Financial Holdings Company.  Richard Cayne has a long history in the wealth management area starting in Tokyo Japan and has assisted many High Net worth Japanese Families plan for future generations.