Global economic conditions seem to be improving, but Perpetual warns that equity investors should tread carefully for the time being.
In a note to investors, Perpetual's head of investment strategy for multi-asset, Matt Sherwood, said investors should look to diversify their portfolios under current circumstances.
“The global economy is lacklustre, political risks are rising, leverage is high, corporate profits are stagnant and policy stimulus is unlikely to be the game changer that investors want it to be,” he said.
Mr Sherwood said recent rises in markets were based “on expectations of further policy stimulus and nothing more” and cautioned investors that while earnings are not as bad as expected, they need to be wary of “borrowing from future returns”.
“Investors are placing a lot of faith in central banks and fiscal authorities to increase stimulus and improve the growth calculus, but both of these supports are less likely to generate positive growth deltas than was the case 12 months ago,” he said.
Recent macro-economic data has shown an improvement in several markets, but Mr Sherwood argues this alone is not sufficient evidence of positive growth.
“Although US and emerging market macro data has been somewhat better in recent weeks, the improvement is against a fairly sombre global backdrop where growth is not to the level which suggests that future earnings expectations are remotely achievable,” he said.
Mr Sherwood also noted that bonds are presently “unlikely to give the traditional levels of diversification”, with equity assets likely to hold their value in the near term.
“Equity valuations are stretched but unlike bonds, they are not yet at historic extremes and given that it has historically taken three rate hikes to burst equity asset bubbles, share prices could remain elevated for a while yet,” he said.