While market risks remain elevated, a new report from BCA Research indicates that it believes equities are an increasingly good bet.
The independent investment research firm emphasizes that the tail risks facing the global economy and financial markets will persist in 2012, making it another difficult year for investors.
And, while monetary policy will remain extremely easy, “low rates by themselves do not guarantee that risk assets will perform well, especially since profit margins are extremely high (i.e. the risk is to the downside). But at least valuation is reasonably attractive.”
Indeed, it says that “over the medium-to-long term, the total return to equities should easily surpass bonds, even factoring in very weak growth.”
“For example, if we assume extremely pessimistic nominal earnings growth of 3% over the coming decade and a compression in the price-earnings ratio to 10, equities would still deliver returns above current bond yields. A more reasonable expectation for global equity returns would be something between 7% and 8% a year,” it says. For the U.S., it predicts equity returns of around 6%, “reflecting lower earnings growth and a lower dividend yield”.
“The bottom line is that equities should still deliver reasonable returns relative to bonds over the medium-to-long run. We therefore expect to move back to overweight equities sometime this year,” it says.