Global equity markets could still eke out single-digit returns over the next few years, says Grant Samuel Fund Management (GSFM) investment consultant Stephen Miller, but there are plenty of risks to negotiate.
Mr Miller, who left BlackRock after a 14-year career as head of Australian fixed income in December 2016, joined GSFM on a part-time basis in February 2018.
Speaking to InvestorDaily, Mr Miller said that US 10-year treasury yields are on track for 4 per cent by the end of 2018, assuming the US Federal Reserve goes ahead with four hikes during the year.
Yields at 4 per cent would begin to be a headwind for equities, Mr Miller said, but an increasing US budget deficit and a trade war would make 10-year yields of less than 4 per cent challenging for stock markets.
“It’s almost unprecedented that the US would have a budget deficit well in excess of 5 per cent of GDP when it’s close to full employment in peacetime,” Mr Miller said.
The US Congress has passed a corporate tax cut bill that will cost US$1.5 trillion over 10 years, as well as a budget deal in the past fortnight that will add US$300 billion to the deficit over two years.
“That means you get a big budget deficit, and that’s a worry. It makes the Fed’s job harder: how much stimulus should they take out of the economy?” the investment consultant asked.
A trade war, which appears to have been started following US President Donald Trump’s decision to impose tariffs on steel and aluminium, is also a real possibility, Mr Miller said.
“If we have a lower rate of growth and a higher price level for the higher short-term inflation rate as a consequence, that’s not a good environment for risk assets,” Mr Miller said.
The main risks for investors are higher yields, lower growth and (as a consequence) lower equity returns, the investment consultant said.
