In a recent interview he describes the S&P as being over-valued by 50-70% and that globally there is a “hideous” opportunity set out there.
“And that’s a reflection of the central bank policies around the world,” he said. “They drive the returns on all assets down to zero, pushing everybody out on the risk curve. So today, nothing is cheap anymore in absolute terms. There are pockets of relative attractiveness, but nothing is cheap or even at fair value.”
Asset Allocation Research’s Dominic Picarda backs this up, adding: “US stocks are unambiguously dear. This bodes ill for returns on American equities over the next few years [and] has prompted me to look at the longer-term outlook for UK shares which have also enjoyed five years of upside.”
Parada is predicting double-digit annualised returns for the over UK in the coming seven years.
Using a price-to-book ratio as a guide to very long-term returns for the UK market, he says this currently stands at 1.87, slightly above its long-term average of 1.82, that is consistent with an annualised real total return of 10.1%.
“All in all, UK large caps are not dearly rated at present. Past relationships suggest solid returns for this market over the coming years,” he concludes.
There are caveats, according to Parada, with value clustered around the natural resources and banking sectors, for example.
Tying it back to the US, he says: “The FTSE and other developed markets may struggle to fulfil their potential in an environment where the world’s most important stock market does badly, as valuations currently suggest.”
The original interview with James Montier was with ZeroHedge.
For more of Dominic Picarda's views, please go to www.assetallocationresearch.com.
