True signals
One of the key changes to the investment landscape that has led to the situation above is the distortion wrought by quantitative easing measures.
“We are relatively cautious around markets, and equities in particular, because of valuations. At best, equities are at fair value; at worst they are overbid, largely because there is no alternative,” says Wainer.
“Because the fixed income and credit markets have been so badly squeezed and frustrated by policymakers, they are not really sending out true signals about what nominal returns should be.
“Quantitative easing and everything else has made a number of asset classes almost redundant to the investment story because you can’t go there in the way you used to.”
Adding to the lack of choice, says Wainer, there has been poor performance of hedge funds and absolute return strategies since the crisis.
“There is still a very small number of good alternative investment managers but you can’t find them after the fact. Looking ahead, that takes another substantial asset class out of the equation.”
All of this means there is a tendency for equities to be overbid because of a lack of other investment opportunities. But while this does not mean they should be dismissed entirely, being selective is increasingly important, especially as the world moves towards higher inflation, higher interest rates and steeper yield curves.
The mix between value and growth will shift but Wainer says one must be quite cautious in calling for a big leadership change in stocks.
“It is still important to retain a diversified approach because there have been a lot of false starts over the past few years, whether it is emerging markets, style leadership or interest rates.”
Thus, for Wainer, it is less about the big calls and more about the proportion that one has in each strategy.
“It would be too radical to rule out a particular area or have no duration in bonds, for example. The scenarios are just not stable enough and the world remains vulnerable to political events in Europe,” he says.
“We are still living with the financial crisis. I think it could easily persist for another five years because its impact has been so high and it has led to behavioural change.”
