“It’s time to re-invest in equities. Despite the constant danger of sudden market slumps, equities are a fundamental component in the portfolio of a long term investor,” says Dr. Jens Ehrhardt, CEO of DJE Kapital AG, which manages the Funds of GAMAX Management AG.
With prevailing low valuations, he sees current market levels as a good investment opportunity to buy into future positive equity performances. Whereas economic forecasts may indicate a possible slow down in economic activity during the coming year, the medium-term outlook for equity markets is positive starting from early 2012 and into 2013.
“Today, there is no such thing as a real “safe” asset class,” according to Dr. Jens Ehrhardt, CEO of DJE Kapital, and Portfolio Manager of the Funds of GAMAX Management AG. For a long time, bonds issues by developed countries were considered the gold standard for safe investment, but, that time is over. Today, the markets are nearly unanimous about the risk of one or more sovereign defaults in the years ahead. Even alternative “safe havens” like real estate and gold are not immune to the risk of losing their lustre – for reasons that are not yet foreseen. As things stand today, there are no simple solutions when it comes to make the right investment. “Nobody wants to hear it, but it is more important than ever to diversify in a range of asset classes,” says Ehrhardt.
Equity Markets Feature Remarkable Risk-return Profiles
“With a view to risk diversification, we consider equities to be a critical component of an investor’s portfolio,” says Ehrhardt. He believes that the markets offer some great bargains at the moment, both when looking at dividends and at the fundamental value of cash, properties, buildings and patents held. “Prices in almost every market are currently at the same levels of March 2009, when equities were definitely undervalued despite the economic recession. This is why we believe stock prices will recover,” says Ehrhardt stating that the current market situation and levels reflect an excellent risk-return environment for investors.
Nonetheless, he says, investors must keep their eye on the unfolding debt crisis and the impact of potential sovereign defaults. If it is possible to isolate the problems of individual states, Ehrhardt believes equity markets will improve by the end of the year.
For 2012, he expects that the low prices of stocks will attract fresh capital, which will bolster the markets, even if Ehrhardt believes that corporate earnings will not recover in 2012. However, as it has often been the case, stocks prices anticipate the improvement of company profits even before the recovery sets in and, given the low interest rate environment, it is conceivable that the upturn will follow in 2013.
“Still, investors and asset managers will need strong nerves over the coming year, because volatility will continue to rule the markets. Many of the problems currently facing the economy cannot be solved with quick fixes; the processes will be prolonged and, in some cases, painful,” foresees Dr. Jens Ehrhardt.
Easy Money Policy benefits US Equities
Fundamentals in the US remain weak. The country has one of the worst trade balances worldwide. Unemployment has not abated, real estate markets are still “on the ropes” and wealth distribution is extremely skewed. The US equity market, on the other hand, is awash with liquidity – which is beneficial to stocks. The expansive monetary policy of the Fed has meant that money supply is growing more rapidly than necessary to finance growth. No country in the world has as much excess liquidity as the United States and this is having a positive effect on stock prices, which will continue as long as the central bank leaves the spigot open. As it looks today, there is no foreseeable change expected in Fed policy over the medium term. “We are getting closer to the presidential election year in the US, and looking at the nation's deficits, the Fed is likely to fire up the printing presses once again to keep the economy afloat,” explains Ehrhardt.
Asian Growth Juggernaut not to be Held Back over the Long Term
The best outlook, however, is in Asian equities according to Ehrhardt. In many Asian markets, the fundamental valuation of companies reveals very low price/book ratios. Moreover, dividend payouts by some companies are indicative of a very positive investment scenario.
“Naturally, Asia is not without risks, but, times have changed, and no longer are extreme low valuations to be seen in European stocks only – Asian equities also offer some excellent bargains,” according to Ehrhardt.
He attributes this to the fact that many global investors are expecting a hard landing for the Chinese economy, despite the fact that China has successfully kept inflation under control. In fact food prices are falling, or at least no longer rising as they used to be. This should give the country’s monetary policymakers the flexibility they need to loosen sometime in the coming year, which Ehrhardt sees as a positive signal over the medium term and over the longer term, Ehrhardt also believes that the Asian growth story is far from over.