Swiss asset managers reckon that stocks are due for a fall. They're also not sure whether bond markets provide a refuge, given ultra-low central bank interest rates.

Almost all Swiss asset managers predict that the global equity market will drop in the next six to 12 months, suggesting that they think stocks are overpriced.

A survey of 100 asset managers in Switzerland, conducted by Managing Partners Group, the Geneva-based asset management group, showed that 44 per cent of them expect stocks could slide by between 30 and 40 per cent. And 98 per cent of the surveyed firms think there will be a correction. 

The most likely catalyst for a drop is expected to be a natural disaster or a military conflict, which was cited as a potential cause by 60 per cent of respondents.

Other potential causes include a price bubble correction (49 per cent); a financial crisis (42 per cent); a recession (34 per cent); the Federal Reserve losing control of quantitative easing (28 per cent); a major default (25 per cent); or that a large fund blows up (8 per cent).

After the roller-coaster of 2020, when stocks were initially smashed by COVID-19 and later bounced back on massive central bank money printing, equities have continued to push higher. There are concerns about rising inflation in certain nations such as the US and the UK, however, bringing with it expectations that at some point central banks will dampen monetary easing and hike rates.

In the US, the S&P 500 Shiller CAPE Ratio (aka the Cyclically Adjusted Price-Earnings ratio), stood at 37.98 in July, up from 37.05 last month and up from 29.60 one year ago, and the highest level in three years.  (The ratio is used as a valuation metric to forecast future returns, where a higher CAPE ratio could reflect lower returns over the next couple of decades, whereas a lower CAPE ratio could reflect higher returns over the next couple of decades.)

“There is almost a universal belief that equities are overpriced, so there needs to be a trigger to correct prices,” Jeremy Leach, chief executive, MPG, said. 

“In the US, the inflation rate is now 5.4 per cent which is around twice the earnings on the S&P 500. How much more is needed to show how much equities are overpriced?” he said. 

MPG said high and rising inflation will cause a correction in the bond market too, which will be worrying for Swiss asset managers, who traditionally maintain substantial exposure to fixed securities.

The firm, which invests in areas such as US life settlement policies, said it provides an alternative when bonds no longer provide an attractive alternative to equities, given valuation levels. Alternative assets such as commodities and real estate are also attractive options. 
 

Life settlements are US-issued life insurance policies that have been sold by the original owner at a discount on their future maturity value and are institutionally traded through a secondary market.

MPG said its research showed that 94 per cent of Swiss asset managers would now consider investing in life settlements.

Life settlements are attracting large institutions and service providers including Apollo Global Management, GWG Life, Vida Capital, Broad River Asset Management, Red Bird Capital Partners, Partner Re, SCOR, Berkshire Hathaway, Coventry First, Wells Fargo, Bank of Utah, Wilmington Trust and Credit Suisse Life Settlements LLC.

Valuations
Wealth managers agree that markets are looking overcooked. Ahmet Feridun, investment director at Cazenove Capital, wrote in May: “We are now in the unusual situation of global equities, bonds and credit all trading at some of the highest levels ever. What makes this period of expensive valuations particularly unusual is that it coincides with low levels of economic activity. This suggests that investors are pricing a lot of future growth into today's valuations.”

“It would be hard to make the case for valuations rising much higher from current levels. There is a risk that the anticipated recovery fails to materialise - perhaps due to new variants of the virus. In this case, much of the future growth priced into equity markets could quickly unwind. There is also a possibility that policymakers have overstimulated the economy, creating too much inflation and forcing them to withdraw the safety net of low interest rates and asset purchases those investors have come to rely on. The recent rise in bond yields is evidence that the market is assigning an increasing probability to this outcome,” he said. 

If Tesla – the electric carmaker – is taken out of the numbers, US stocks have actually drifted lower, Feridun said, suggesting that valuations are more sustainable than they may appear at first glance.

Edison, the investment research, investor relations and consulting firm, said in a note on 20 June: “We believe investors are aware of their limited investment choices at present. Low bond yields, low corporate credit spreads and the anticipation of an extended period of accommodative monetary policy into 2022 are in our view the primary driver of relatively high equity valuations – and it is not necessarily irrational.”

(On a separate theme, this news service has been covering developments in the Swiss market for external asset managers. See here for regulatory developments.)