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Dr Brian Fabbri: US, Japan, or Europe?
Aspire, Thought Leaders | 22 April 2015
By: Lim Si Jie
Articles (169) Profile

Years ago, the US Federal Reserve took the plunge to keep its interest rates near zero and introduced QE (Quantitative Easing) to purchase USD$3 trillion worth of outstanding Treasury and Federal agency backed mortgage securities.

Shinzo Abe’s Abenomics followed suit with near zero yields on Japanese bonds and purchasing enormous quantities of Yen-denominated government bonds in efforts to kickstart Japan’s economic growth and rescue the economy from long-term deflation.

Now, the ECB (European Central Bank) has decided to join the acquisition race and announced its intention to purchase one trillion Euro of government-issued bonds. Dr Brian pointed out that all of these developed country central banks have created an enormous pool of liquidity throughout the world “without igniting rapid economic growth anywhere.”

Era Of Deflation

An era of deflation creates a new challenge for investors to cope with: uncertainty and how to hedge against them. Most investors do not have much trading experience in deflating markets. The only and probably most important example of deflation in modern era would be the long period of deflation in Japan since 1990s. Then came Abenomics and the stock market looked more alive than it did for two decades.

Future For Investors?

According to Dr Brian, investors will most likely “retain their overweight positions in equity securities for a while longer.” This is essentially because of the depressing yield on bonds in developed countries. Such low yields will only continue until central banks decide to raise interest rates. Undoubtedly, central banks adopted their own versions of QE to perpetuate a rush into equities.

So the most important question: US, Europe or Japan equities?

US Equity: Appreciating Dollar Hurting Economic Growth

The PE (Price-Earnings) ratio of the S&P 500 index (both trailing and projected earnings) is currently hovering around its historic average. Dr Brian thinks that this is a signal that the S&P 500 Index is currently not overvalued.

With the appreciation of the dollar, manufacturing output growth has stalled and competitiveness is suffering. Slower economic growth and rapid expansion of employment will cause productivity to fall and corporate profits will follow suit.

Dr Brian believes that in spite of present neutral valuation of the US equity market, returns in 2015 are “most likely to stall and return far less” than other major developed markets.

QE To Push Equities Higher

The aggressively executed QE by Japan and Europe have been encouraging investors to jump into the equity market in anticipation of rising competitiveness and profits. However, returns on both equity markets have dwarfed returns in the US stock markets.

Conversely, as long as both central banks continue to create liquidity and depreciate their currencies, Dr Brian expects equity returns to continue rising in both markets.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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