An unusual period of excess liquidity has helped equities and risky assets, but it is now unwinding and adjustment will be painful.
There are big secular shifts in asset allocation under way as large institutional investors suddenly realise that they areEvery week we are reading new media reports of superannuation funds and sovereign investors seeking to get more exposure to the 5 per cent to 7 per cent interest rates on cash and investment-grade fixed-income.The problem, of course, is that many investors are stuck with excess holdings of illiquid assets.
This is why at the looming Jackson Hole central banking conference we are likely to hear the chair of the US Federal Reserve, Jay Powell, tell us that his inflation fighting job is not complete. This was similar to the recent decision to sell $7.9 billion of the taxpayer-owned VicRoads on the alleged promise to repay COVID debts—only for Victoria to do the opposite and speculate that money in global financial markets.
Our latest research finds that cyclically adjusted price/earnings multiples do a decent job over the long-run of anticipating future US equity returns. And based on this relationship, the 10-year expected returns from the US equity market are the lowest they have been since just prior to the calamitous correction during the global financial crisis.
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