In a strategy note out today, the private bank said although quality bonds might look expensive, they will remain in demand.
Because there is now less supply of what can be deemed high-quality government bonds without credit risk, Coutts said they are not as expensive as they appear at first glance.
“An era of deleveraging and hence lower earnings growth will mean that equity investors will demand a higher risk premium, or in other words, they will pay lower multiples for each dollar, pound or euro of earnings,” the bank said.
In its equities strategy, the bank said it would look to high quality companies, which it said are more likely than weaker sovereigns to return capital.
“Corporate balance sheets are in better shape than governments, and high-quality companies are more likely to provide return of capital than some weaker sovereigns,” the bank said. “As of the end of July, corporate bonds had outperformed global government bonds in the year to date, and should remain supported by healthy financials.”
Coutts believed to ease the deleveraging process, zero/near-zero interest rates would have to remain in place for a multi-year period. Both the Fed and the Bank of England would therefore engage in further quantitative easing, it said.
“Policymakers can slow the process of deleveraging, but they cannot stop or reverse it,” the strategy note advised. “Consequently, a good outcome over the coming years would be annualised US growth of 2%, effectively the ‘stall rate.’ Due to the fragility of the recovery and the increasing exhaustion of policy options, the risks are to the downside.”
