Elston told What Investment that whilst he has no concerns about the impact of an interest rate rise on equity markets, remarking that, ‘history tells us that the impact happens years later’, and is keen on equities relative to bonds, ‘people underestimate the fact that companies can change, can do things differently, they can produce less or move prices, whereas if you buy a bond, there isn’t the capacity for that to happen,’ he has been avoiding the US.
Elston commented, ‘We think that the valuations in the US market are not justified right now. The market is trading at a price to book of 2.7 times, while the UK and Eurozone are 1.8, that is too big a gap.’
He feels that too much attention is being paid to the fall in US, and to a certain extent UK unemployment, as some of this is reflected in the changing demographics and ageing populations meaning lots of people are leaving the workforce. Many investors have also argued that it is worth paying for the extra security that comes from the US market, but his view is that the market is not yet at the stage where such considerations should be a priority. He said, ‘The US market might go up in 2016, but only because the others will have gone up.’
With interest rates likely to stay at this particularly low level for an extended period of time, Elston believes that equity markets will continue to do well, because retirees and those planning for a pension, will grow frustrated by the continuing low returns offered by cash and bonds, and so will turn to equities.
He added that while the yields on equities have fallen, ‘they remain within historic averages.’
Elston concluded his comments with the remark that ‘At this point in the economic cycle, when the economy needs encouragement rather than restraint, we like to be in mid caps, and we are very overweight UK mid cap stocks.’