Global equities are not cheap, despite the claims by many market analysts, because earnings forecasts are much too high, hedge fund manager Dr Jamil Baz told delegates at the van Eyk annual conference in Sydney yesterday.
“Profits are heading only one way and that is south,” said Dr Baz, chief investment strategist at GLG Partners, one of the world’s largest hedge funds.”
He said the painful process of deleveraging that economies would have to go through had barely started, particularly in Europe, noting the total debt to GDP ratio in Europe had not changed since the onset of the global financial crisis.
Governments had few of the traditional weapons to offset the effects of debt reduction such as lower interest rates because these were already at near zero or zero.
“The crisis hasn’t even started and will take 15 years to resolve,” he said.
He noted that the sick economies of Europe would have to cut their wages by 25 per cent just to be competitive with Germany, something their populations would not tolerate.
“Even Mussolini couldn’t force such a wage decline in Italy,” he said.
The fact that European governments and Brussels were trying to impose this level of austerity on their populations showed the biggest deficit in Europe was a “deficit of democracy”.
Dr Baz said earnings forecasts for equities “were less about economics and more about theology” these days. Dividends were a better way of measuring valuations and on that basis equities were not cheap. Corporate bonds were better value; even US Treasury bonds were cheaper. He said the global equity risk premium over bonds was only 2.5 per cent when 5 per cent was more realistic given the economic situation.
However, there were some beaten down equity markets he advised investors should be overweight in, such as Russia, the Middle East and countries in Peripheral Europe.
