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Our Blog

Growth matters

23 July 2015
asset, emerging, market, returns, shares, valuations
It is easy to get caught up in the ongoing drama and lose sight of the fundamentals. Valuations are the key determinant of asset returns over the medium term and our view is bonds are still expensive, developed market and New Zealand shares are fully valued, whereas commodities and emerging markets remain inexpensive relative to longer term trends.

The chart below plots global growth versus US 10 year treasury yields, which can be thought of as the global risk free rate. The chart shows a reasonably tight relationship between growth and bond yields.

Global growth versus bond yields

Source: Bloomberg, AMP Capital

The decline in yield in the first quarter of 2015 coincided with a decline in growth, and the rise in yields in the recent quarter coincides with an expected recovery in growth.

The growth cycle also matters for equities. However, developed market shares decoupled from growth over the last few years. Zero cash rates and quantitative easing (QE) no doubt contributed to developed market outperformance.  This represents an underperformance risk going forward as QE ends and global cash rates are eventually lifted from the floor.

Global growth versus developed market equities

Source: Bloomberg, AMP Capital

In contrast, emerging market equities have tracked much closer to growth as these markets have not directly benefited from QE or zero cash rates. This helps explains why emerging market shares are currently trading on a price to forward earnings ratio of 12 versus 17 for developed market shares.

Global growth versus emerging market equities

Source: Bloomberg, AMP Capital

We expect the situation in Greece to dent but not undermine this trajectory. Thus we expect bond yields and equities to rise from here but there will be some setbacks along the way.

This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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