Even though economic growth was weak last quarter (and negative in the US), Rothschild Wealth Management is bullish on global economic growth and believes that developed economies should continue to expand and emerging markets stabilize through the rest of the year as capital spending picks up speed. Even though it calls equity valuations ‘stretched’, especially in the US, it still believes that equities are the most attractive asset class available.
“Notably, in developed markets capacity utilization is high, the current stock of capital is aging, and leading indicators of capital expenditure are pointing upwards,” writes Dirk Wiedmann, chief investment officer at Rothschild Wealth Management.
Rothschild thinks overpriced US equities will continue to rise
Even in the US where it thinks stock prices are too high, Rothschild Wealth Management favors equities because the combination of abundant liquidity and repressed interest rates can continue to support the market. Federal Reserve Chair Janet Yellen could come under pressure to raise interest rates higher than she currently intends, but Rothschild doesn’t think that will happen unless the economy is growing fast enough to drive corporate earnings, which would boost stock prices anyways.
“This pattern applies particularly to the US market. It is the most overvalued region but equity prices could continue to rise,” Wiedmann writes.
Rothschild avoiding government bonds in favor of corporates, real assets
Rothschild is avoiding long-maturity nominal bonds in favor of short-maturity corporate bonds because its worried about a return to normal monetary policy and there is still a decent yield advantage to investment grade corporate bonds. Beside, with so much cheap financing the risk of a major foreclosure is lower than during less accommodative times.
Since equity exposure will protect its portfolio against inflation over an economic cycle, and government bonds aren’t very attractive, Rothschild Wealth Management has a sizeable exposure to real assets including gold, real estate, and inflation linked bonds. The client letter cites a recent decision by the Reserve Bank of India to relax gold import rules as providing support for gold prices even if the US recovery puts pressure on them. Rothschild is also investing in hedge funds that are positioned to adapt to unexpected interest rate hikes.
Rothschild happy with US housing market, for some reason
While almost everyone else is disappointed with the US housing market, citing the slow pace of home sales and mortgage originations, Rothschild Wealth Management cites it as a bright spot in the economy.
“Conditions in the US housing market also appear to be improving. New starts and building permits were both stronger in April. Meanwhile, housing supply across many cities remains tight and demand is high,” writes Wiedmann.
These may be valid leading indicators for the US housing market, but they haven’t yet translated into higher sales volumes.
See full report on “US Is The Most Overvalued Equity Market: Rothschild” in PDF format here.
