Overvalued US equities continue to get more overvalued. The success of the recent Twitter IPO reminds us that high prices and overvaluation to investors means lower cost of capital for issuers. Over the past few years in bond markets, returning investor risk appetite pushed prices higher and yields lower. This lower cost of debt capital was greeted warmly by issuers, who happily took advantage of the very attractive financing terms. Increasingly, the same process is unfolding in the US equity market and we should expect the US IPO market to gain momentum as a result over the coming months.
Weaker markets in Asia are beginning to attract our attention from a valuation perspective. However, we believe the more attractive nearer term valuation return opportunities remain in Europe.
We maintain full equity exposure today but protect clients by having above-normal allocations to certain non-US equity markets and below-normal allocations to US equities.
Following strong developed equity markets this year, credit spreads have tightened to one year lows. A slowly recovering US economy and plenty of monetary support globally continue to encourage credit risk taking. Monetary policy observers recognize that the current policies of major world central banks are very far from neutral. Investors are being reassured by central bankers that even when bond buying programs eventually end, real short term interest rates will remain below zero.
We maintain full bond exposures today but avoid owning Treasuries and long duration bonds.
