Global equities have posted double-digit price gains in the first five months of 2013 amid historically low volatility. However, because so much of the global stock market’s recent large gains are based on hopes not yet realised, a return to higher levels of share market volatility is likely in the next few months, according to Citi Private Bank’s global chief investment strategist, Steven Wieting.

Wieting said he expects a return to higher volatility in equity markets over the next few months until more evidence of a stronger, sustained US and global recovery accumulates. In addition, he believes the outsized share price spike of early 2013 highlighted how complacency has been building in many indicators, providing an environment ripe for a pullback.

"Risk markets have improved more than fundamentals during early 2013. This is a typical recipe for a short-term setback which usually doesn’t take a strong excuse. US equities posted inter-year declines in each of the past three years averaging -15.1 per cent, without derailing a truly historic bull market recovery," Wieting said.

Earnings growth still ahead

However, despite this short-term trend, Wieting said the sustained economic recovery he expects suggests high single-digit positive global equity returns over the next two years or longer.

Shares jumped more than earnings in the first few months of the year in the US. Earnings per share in the first quarter of 2013 rose by around 5 per cent, far stronger than the low ball estimates of analysts who projected near-zero levels towards the end of the quarter.

"In 2013, we expect the earnings per share level for the S&P 500 to be 30 per cent above its 2007 peak, with share prices up far less. Unlike 2007, the US economic recovery isn’t over. Relative to equities, fixed income is mispriced for the fading crisis we expect and a greater portfolio risk for the long-term investor," said Wieting.

Japan

Wieting points out that he expects the radical change in the country’s monetary policy to be felt significantly in its economy and share earnings, but maintains that this will take time.

"Most of the Japanese market rise this year reflects expectations that quantitative easing will be felt in Japan’s economic performance going forward. But Japan’s economy can’t turn as fast as its stock market can rally. For various reasons, including the foreign exchange impact, the positive effects could be measurably stronger than in the US case," said Wieting.

"For equity markets, quantitative easing has provided a dose of liquid courage, but actually little else in an immediate sense, particularly in the case of the US. Failing to view central bank quantitative easing as largely an offsetting action for a severe deflationary systemic financial shock has been a key mistaken assumption in recent years for many gold investors in our view," he added.