Mr O’Brien noted the ASX 200 was trading on 11 times forward earnings, the MSCI World index on 12 times forward earnings, and the MSCI Emerging Markets on 9.5 times forward earnings. “These are not outstandingly good valuations but they’re not bad,” he said. “Compare equities to something like Australian residential property, where the P/E might be 30 times.”

However, the uncertainty over the European debt crisis and general economic uncertainty would continue to act as an impediment to an upswing in equity markets in 2012.

Similarly, investors were likely underplaying the potential for political and economic turmoil to damage markets and other threats like a potential breakout in inflation. “We still believe that political risk as it affects market returns is underrated as we did in 2011,” Mr O’Brien said. “Iran, the Arab world, Latin America, even stable countries like Thailand could all have problems this year.” Mr O’Brien said. “That informs our short term view on emerging markets, which is that they are a strong long-term growth story but not enough attention is paid to the political components of those stories.”

But after several years of poor returns and the loss of faith by many investors in shares, the contrarian investor would see this as a signal that the asset class was turning the corner, Mr O’Brien said.

“The difference between the benchmark US Treasury bond yield of less than 2% and the equity earnings yield of 8% is as stark as ever,” Mr O’Brien said.  “We can certainly say that piling into low-yielding assets, like bonds, at ever-higher prices isn’t a long term solution.”

He added that volatile markets this year would test the nerves of value investors but that the strategy had proven itself over the long term.

Mr O’Brien expands on his views in an article and video in the new February issue of the van Eyk View, van Eyk’s monthly investment newsletter for financial advisers and industry professionals, which is now available on the iPad.

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