The asset allocation of the 1OAK Multi-Asset Funds is guided by BlackRock, the largest asset manager in the world. The Blackrock asset allocation is based on their comprehensive analysis of expected risk and returns from different assets, economic trends, geopolitical developments and all the other factors that influence investment returns. 1OAK view from the rock aims to offer a brief synopsis of the latest thoughts and views from Blackrock.
Equity valuations: OK for now
There is always a steady background drone from market commentators predicting the end of the investment world or something close to it. Recently the warning cries from doomsters have become a bit more shrill. They point to multiple signs that there is a bubble including increased participation by amateur investors. The ability of Reddit reading day traders to scalp Wall St hedge funds - before suffering catastrophic losses themselves, and indices that show a sharp increase in the number of tech companies that trade on extreme valuations. The FT has even started a “Runaway Markets” section where they collate stories that support this view. To quote the FT: “Investors are brimming with enthusiasm as 2021 kickoff, with market-friendly trends including a new US Administration, historic government and central bank stimulus and record-low borrowing costs converging”
Blackrock does not share these concerns and offers instead a considered and balanced view. In a recent commentary on market levels, they comment that overall equity valuations do not look stretched. Low interest rates, some inflation and the vaccine facilitated economic restart will, in their view, continue to support risk assets.
Blackrock acknowledges that very low interest rates make equity valuation tricky. It’s particularly tricky to compare the normal ratios with a period when rates were much higher and so they focus on the equity risk premium or the return above risk-free rates. On that basis, the US equity market does not look stretched. They dismiss the volatility in GameStop as a technical factor as the wrong thing to focus on.
Blackrock notes the strength of the rebound in asset prices that we have already seen, which inevitably has a dampening effect on the scale of future returns. There are some dark clouds that they see as having a negative effect: these include delays in vaccine deployment, new virulent strains of Covid, an increase in rates and/or a less relaxed approach to the level of public sector debt.
So the bottom line is that equity values have discounted some, but not all of the re-start in economic activity that Blackrock forecast. Equity valuations are not stretched, but not particularly cheap either.