Speaking to InvestorDaily, Aberdeen AM’s Stephen Docherty said the record low interest rate environment globally is pushing pension funds up the risk spectrum into equities.
“We live in a wacky world today where … sell-side people are talking about the ‘new normal’,” Mr Docherty said.
Market “manipulation” by central banks in the form of quantitative easing has created a situation where Portuguese Government bonds are cheaper than US paper, he said.
“That means the market is saying fundamentally that it’s less risky to invest in Portuguese 10-year debt than it is to invest in US 10-year debt.”
On top of that, an investment in Swiss 10-year government bonds will deliver investors a negative real return.
“I don’t understand why people place so much confidence in central banks and governments, I really don’t,” Mr Docherty said.
But pension funds have to invest in something to meet their continuing liabilities, he said – and equities are now the “least-bad option”.
“From a long-term perspective, that’s not the best of reasons to buy equities,” Mr Docherty said, somewhat wryly.
As a result, frothy equity markets are becoming detached from fundamental measures of value.
Rather than investing for future growth, US corporates are borrowing to buy back their own stock, Mr Docherty said.
“And they're using cash to do that, so you’ve seen multiples up and earnings growth lagging way behind.
“Where do your future earnings come from? Because if your margins are already at record highs, you can’t cut your way out of it.
“The more complacent we get today, and the more we push up valuations today, the higher the expectation.” he said.
Mr Docherty said when things get back to whatever ‘normal’ is, it’s likely investors will be disappointed.
“When there is disappointment via high valuations, normally you suffer through price.”
Pensioners are getting pushed into risky assets “almost by default", he said.
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