More volatility looms for bonds and equities – SYZ AM

SYZ Asset Management multi-asset man Hartwig Kos has predicted that bond markets will remain volatile, manipulating equity valuations further.

More volatility looms for bonds and equities – SYZ AM

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“Out of all the uncertainties we are going to face in 2017, probably the only certainty we have is that we will see more volatility,” said Kos. 

Bond markets remain expensive, he said, and that continues to have far-reaching implications for the wider investment universe and equity valuations. 

“On our metrics, equities are probably fair value not because of their intrinsic cheapness through corporate earnings but because of the mere fact that bonds are very expensive,” Kos remarked. 

He continued: “Equities are likely to outperform bonds, but we would expect equity returns to be pretty low. Given the fact these equity valuations are so dominated by bond valuations, in the equity risk premium framework you can expect bond volatility to continue having an impact on equity valuations.” 

That being said, Kos has a clear preference for equities over bonds. In the near-term, he is eyeing European equities, which in his view, look cheaper than US equities and have weathered the worst of the political storm with the Italian Referendum in the rear-view mirror. 

“In 2016, a lot of investors had been assigning a high political risk premium to European equities. But now, you have fairly strong economic activity in Europe and you have a euro that is significantly weaker than it was six months ago, which is only partially reflected in the equity valuations. We would expect that positive backdrop to help European equities to progress further.”

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