One of three interconnected Shocking Predictions from Coolabah’s Chief Investment Officer, Christopher Joye at Livewire’s Live event.
Chris Conway from Livewire Markets writes those hoping for equities to bounce back from their recent slump and power higher will be left wanting, at least when compared to bonds.
That’s the key message Christopher Joye, CIO at Coolabah Capital, had for investors during his Livewire Live ‘Shocking Predictions for 2024 and beyond’ presentation.
More specifically, the prediction was that “risk-free cash, government bonds and bank bonds will beat equities over the next 2-3 years”.
The timing of the prediction could hardly be more propitious, with a recent surge in bond yields sparking a global sell-off in equities. The surge was prompted by hawkish comments from the Fed and BoE that interest rates will likely remain elevated for an extended period.
That said, it’s US stock valuations and their relationship to inflation that Joye leans on as evidence that bonds will outperform.
“Equity valuations look rich and when we analyse the relationship between core inflation and equities in the US, PE multiples are actually inversely correlated with core inflation in the US.”
“At a 4-5% core inflation rate, S&P500 cyclically adjusted PE should be around 15x. They’re north of 30x, implying that inflation is not a problem – which we think it is.”
Joye goes on to add that history shows that when looking at the forward returns of the S&P500 once the multiple pierces 30x, “we find that they’re demonstrably negative in every period, particularly when you adjust for inflation”.
“So future returns from equities once you reach these valuation heights look very, very unattractive.”
Whilst bonds over equities would be considered the core thesis of Joye’s message, he also has two other major predictions that provide support to the core – namely that we’re about to see the worst default cycle since the GFC and the 1991 recession, and the avoiding illiquidity will be critical in coming years.
Watch the video below for the full thesis and to understand how these elements fit together.