Emerging market stocks carry high price tag

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“I think we’re seeing the effects of this liquidity supernova that’s been created in the last five years. The US federal government has bought three and a half trillion dollars of debt, which means they pump that into the system. You’ve got the Europeans pumping money into the system, the Japanese. All of this money is sloshing around, it’s got to go somewhere,” Geoff Blount, CEO of Cannon Asset Management, told CNBC Africa.

“We’ve often worried about asset bubbles, and what you’re actually starting to see perhaps globally, but not everywhere, is asset prices starting to rise. When asset prices start to go up, future returns fall off.”

Blount added that an asset that may have done well in the past one to two years is now likely to have reduced future returns, and that the liquidity being pumped into the system has pushed up asset prices to the extent that future prospects are equally low.

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“US equities are expensive now, sitting on 20 plus P/E, whether it’s from rental [or] yields that you’re seeing in many markets in the world where the price of property has gone up. As a result, the rent that you get, which is fixed every month, a percentage of the value of the property has come off,” Blount explained.

“We’ve been seeing for a number of years the effects of this. I suppose the issues going forward [are] investors should prime themselves for lower returns. Ironically, we’ve been saying this for two or three years, and asset prices just keep creeping up. At some stage, I think that normality has to return.”

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The normality includes yields and returns dropping off, which could make for a disappointed investor. While federal tapering essentially means that money will no longer be put into the system, there is nonetheless available liquidity.

“Rising asset prices are also a function of interest rates, it’s not just the money that’s been printed, but also the fact that it’s your discount rate. So if you’re running a zero interest rate policy as you see in much of the developed world, when you have a very low discount rate and you take your future cash flow from an investment, and you discount them to today’s money, a low discount rate means that the value of the future cash flow is much higher,” said Blount.