The chief structural trends driving equity market returns over the past three decades look poised to reverse over the next 30 years, according to Montgomery Investment Management.
Falling interest rates, solid growth in corporate profit margins from all-time lows to all-time highs, a large labour force and a build-up of leverage in the system have all supported equity markets, Montgomery Investment Management portfolio manager Andrew Macken told InvestorDaily.
Mr Macken cautioned, however, that these trends are on the cusp of a reversal, removing the tailwinds that have supported aggregate equity market returns.
“Interest rates can’t get any lower, basically, so the best case is sideways from here but it’s more likely to be up, and up is a headwind for equities and sideways doesn’t really help you either,” he said.
“Corporate profit margins have gone from all-time lows to all-time highs, so we’re starting at a period when they’re at all-time highs.”
“Thinking about the next 30 years, it would be a lot safer if you started at the all-time low rather than the all-time high, so where to from here? I don’t know, but best case is sideways and the more likely case is down.”
Changing age demographics are also likely to weigh on GDP growth, with a flow on effect to equity returns, Mr Macken said, and the “enormous amount of credit that’s built up in the system” will also need to be repaid, stifling consumption.
“You’ve had a dream run over the last 30 years, the starting point today is the exact opposite,” he said.
“No-one knows precisely what’s going to happen next, but it would not seem unreasonable to think the average equity return over this period probably won’t be as high as it was over the last 30 years. That actually seems like a reasonable statement.”