US Has The Most Overvalued Equity Market: Rothschild

June 17, 2014 Leave a comment

US Has The Most Overvalued Equity Market: Rothschild

by Michael IdeJune 11, 2014, 2:20 pm

Rothschild likes equities, short maturity corporate debt, and gold

Even though economic growth was weak last quarter (and negative in the US), Rothschild Wealth Management is bullish on global economic growth and believes that developed economies should continue to expand and emerging markets stabilize through the rest of the year as capital spending picks up speed. Even though it calls equity valuations ‘stretched’, especially in the US, it still believes that equities are the most attractive asset class available.

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“Notably, in developed markets capacity utilization is high, the current stock of capital is aging, and leading indicators of capital expenditure are pointing upwards,” writes Dirk Wiedmann, chief investment officer at Rothschild Wealth Management.

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Rothschild thinks overpriced US equities will continue to rise

Even in the US where it thinks stock prices are too high, Rothschild Wealth Management favors equities because the combination of abundant liquidity and repressed interest rates can continue to support the market. Federal Reserve Chair Janet Yellen could come under pressure to raise interest rates higher than she currently intends, but Rothschild doesn’t think that will happen unless the economy is growing fast enough to drive corporate earnings, which would boost stock prices anyways.

“This pattern applies particularly to the US market. It is the most overvalued region but equity prices could continue to rise,” Wiedmann writes.

Rothschild avoiding government bonds in favor of corporates, real assets

Rothschild is avoiding long-maturity nominal bonds in favor of short-maturity corporate bonds because its worried about a return to normal monetary policy and there is still a decent yield advantage to investment grade corporate bonds. Beside, with so much cheap financing the risk of a major foreclosure is lower than during less accommodative times.

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Since equity exposure will protect its portfolio against inflation over an economic cycle, and government bonds aren’t very attractive, Rothschild Wealth Management has a sizeable exposure to real assets including gold, real estate, and inflation linked bonds. The client letter cites a recent decision by the Reserve Bank of India to relax gold import rules as providing support for gold prices even if the US recovery puts pressure on them. Rothschild is also investing in hedge funds that are positioned to adapt to unexpected interest rate hikes.

Rothschild happy with US housing market, for some reason

While almost everyone else is disappointed with the US housing market, citing the slow pace of home sales and mortgage originations, Rothschild Wealth Management cites it as a bright spot in the economy.

“Conditions in the US housing market also appear to be improving. New starts and building permits were both stronger in April. Meanwhile, housing supply across many cities remains tight and demand is high,” writes Wiedmann.

These may be valid leading indicators for the US housing market, but they haven’t yet translated into higher sales volumes.

 

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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