Investors may be celebrating strong gains in the equity market as the US economy shows signs of accelerated activity, but one expert warns that they could be at risk of consuming futuremarket returns in the present time.
This would leave little room for any market upside, says Tim Hartch, co-manager of US private bank Brown Brothers Harriman's Core Select and Global Core Select funds.
Hartch says equity gains seem to be running well ahead of economic realities, which means the chances of investors consuming future market returns now is a worrying possibility.
"One of our key areas of concern continues to be the risk of asset price distortions and capital misallocation caused by central bank policies in the developed world," he says.
"In our view, the major central banks have veered from their charters in troubling ways – they have effectively become pro-cyclical engineers of asset prices, rather than regulatory bodies tasked with ensuring the soundness of money and providing backstop liquidity to the banking system."
Hartch, who manages more than $24 billion (€18.4 billion) in US and global equities, says the plans of the Federal Reserve and its peers to fight deflation and stimulate lending may not be suitable for a slow growth economic climate. He says he fears the current environment may be incapable of absorbing significant amounts of liquidity created by the central banks' large-scale asset purchases.
Anticipating problems in the areas of asset valuation, leverage and credit quality, he says: "Given that we are more than five years into an equity bull market and corporate debt issuance and credit spreads have reached pre-crisis levels, it is quite surprising that monetary policy has really not even begun to normalise."
Hartch concludes: "Even if a robust economic acceleration does in fact eventually occur, the benefits may have already been front-end loaded into asset prices.
"We are of the view that conservative investors should not assume a further increase in trading multiples or market sentiment."
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