Inglourious Bear-terds

Albert Edwards, the top ranked strategist at Societe Generale, delivers his bearish non-consensus outlook today:

We have just had the worst decade's performance for equity investors on record. Relative to government bonds, equities have been an even bigger disaster. Surely after such a terrible decade for equity investors things can only get better?

On a ten year view, equities may indeed prove to be a good investment. On a 1-2 year view, however, we still see much pain to come. After what we have been though so far, where the bulls' optimism has been crushed in 2001/2 and in 2007/8 surely there must be a heavy weight of self-doubt yoked onto the shoulders of the bulls – but apparently not!

The lesson from Japan is that while de-leveraging plays itself out, the global economy will remain extremely vulnerable. The Great Moderation is dead. It was built on a super-cycle of private sector debt. We know from Japan, we now return to what was before, i.e. highly volatile and unpredictable cycles. Recession will quickly follow recovery.

US equity valuations did not reach revulsion levels in March this year. After some 15 years of gross overvaluation do we really believe that this valuation bear market that has been in place since 2000 will finish with equities looking cheap for only three months? Long term-valuation measures suggest equities will fall substantially below March lows.

Government bonds are now an extremely poor investment. On a 10-year view, the insolvency of government finances will surely end in substantially higher inflation. Yet on a 1-2 year view, we believe the key threat remains deflation. Markets will react aggressively to this as the cycle stalls in 2010. Expect sub-2% bond yields to accompany new lows on the equity market next year. Thinking the unthinkable has paid off over the last decade and should continue to do so.

Click on chart of Multi-Asset Portfolio performances, courtesy of Societe Generale.Interestingly, his colleagues in cross-asset strategy research at the same Societe Generale, suggest the consensus-like asset allocation for the next year. Click on table, courtesy of Societe Generale.


Clash of opinions ... or in-house trade in everything?