There is no beating around the bush for Allianz CEO Oliver Bate on the topic of today’s valuations in the stock market.
“No, I think they [equity valuations] are overvalued,” Bate — who leads one of the world’s top insurance companies and bond giant Pimco as Allianz CEO — told Yahoo Finance in an interview at the World Economic Forum. Bate ticked off several reasons for the cautious stance, all of which should get investors thinking as we near the end of a red-hot start to stocks in 2020.
“We have to look beyond sentiment, we have to look at the underlying facts. There are a lot of risks still involved. We are still at an all-time high in terms of asset valuations, and that means eventually they will have to correct. I think we are much higher than we were in 2007, for example,” said Bate. “We still have enormous political risk. Yes the dialogue between China and the United States has come back, but there is a lot of noise around what’s going to happen between the U.S. and Europe.”
To be sure, optimism continues to ratchet up for stocks in the wake of the signing of the U.S. phase one trade deal with China late in 2019. Further fueling the rally has been an expectation by investors that the Fed will not raise rates in 2020 and in fact, may deliver one more rate cut.
That has subsequently unleashed strong momentum across sectors of the market as traders chase equities on the fear of missing out on more gains. Consider this as a component of that argument: the S&P 500 has tacked on 9.5% in the past three months and has notched 26 record closes since November.
Even more sophisticated investors appear to be ignoring a mixed fundamental backdrop within Corporate America and muted global economic growth and snapping up stocks. Roughly 94% of wealthy investors expected positive returns in 2020, according to a new survey out of UBS. Meanwhile, 44% of wealthy investors anticipated returns in the double-digit area.
At some point in 2020 — and likely soon — investors will have to adjust their expectations on stocks as they are reminded of economic realities and U.S. presidential election season risk. Invesco Solutions COO Mo Haghbin notes the U.S. is growing below its long-term trend. Moreover, Haghbin points out the short-term outlook for U.S. economic growth and consumer spending shows little in the way of momentum as to justify current stock valuations.
Cautions Bate, “We take a very cautious stance in terms of our outlook. We are planning hopefully for a good outcome, but we are also prepared for a not so good outcome.”