“The equity bull market is approaching its dotage and starting to display signs of unpredictability and irrationality,” said Russell’s global head of investment strategy Andrew Pease. “Our models and process tell us it’s not about to end just yet, but we expect volatility to increase as we approach the first Fed tightening.”
However even with these ‘stretched valuations’ Russell’s strategists retain a small preference for equities over fixed income according to its Q4 global outlook update. It said continued moderate global economic growth, subdued inflation pressures and single-digit corporate earnings growth all support a ‘moderate pro-equity bias.’
There are though a number of geopolitical risks that Russell sees as having the potential to pull down equities markets. Chief among these are tensions in the South China Sea, the Russia Ukraine dispute, the rise of the Islamic State and political protests in Hong Kong. At this stage, Russell expects markets to largely withstand these however.
The reaction of global markets to the ending of the Fed’s monetary stimulus is also a concern for Russell strategists.
Geographically, Russell remains fairly agnostic. “Within an overall modest pro-equity bias, there’s not a lot to choose between regions,” Pease said. “The ECB stimulus package puts European equities just ahead of the other regions.”
The preference for equities is not entirely based on their merits, but also due to the unappealing valuations in credit markets. “Credit continues to be viewed as expensive, with both high yield and investment grade spreads below long-term averages,” Pease said. “But, the outlook for moderate economic growth, low inflation, and low default rate keeps the strategists in the asset class. They slightly favour spread products over outright treasury exposure and slightly underweight duration.”
