Share valuations are “fair to slightly high”, with yearly returns of 7-8% more likely going forward than the 15% annualised growth achieved since 2008, Friedman said. However, he stressed that valuation is not yet a levels where mean reversion is likely to detract from returns, and scope remains for price appreciation driven by earnings growth.
“Investors should not expect a repeat of the financial asset performance… especially as monetary policy normalises in the years ahead,” he said.
“And in a world of lower returns, higher rates of inflation could further cut into them. Investors will need to seek alternative sources of return, including private markets, and take a more tactical approach to asset allocation.”
Key changes to UBS Wealth Management’s tactical asset allocation this month include a short position in the yen relative to the dollar, replacing a long position in Japanese equities. This has been made in the belief that Japanese economic progress may stall if structural reform is not forthcoming.
However, more capital has been allocated to eurozone equities in light of the recent ECB interest rate cut, while Chinese equities have been upgraded to overweight after the proposed reforms from the Third Plenary Sessions exceeded market expectations.
An overweight to sterling has been maintained, though the team remains underweight UK equities: “Our quantitative modelling suggests that domestic economic conditions explain just 4% of UK market relative performance since 75% of earnings are generated outside of the country. And the strength in the pound presents a headwind for equity earnings.”
