The US equity market is not overpriced, despite the stellar run-up in valuations that has taken place over the past 12 months, emerging markets specialist Mark Mobius said.
The S&P500 index has gained 53.6 per cent over a 12-month period after bouncing back from a slump in March last year as governments and central banks injected trillions of dollars into the global economy to mitigate risks from the disruption caused by the Covid-19 pandemic.
"I would not say it’s overvalued. I know a lot of people look at price-earnings ratios and price-to-book value ratios but those kind of ratios are becoming less and less important," Mr Mobius told an online event held jointly by the AIM Summit and the Dubai International Financial Centre. "More important is return on capital and measures like that."
Governments have pumped more than $16 trillion of fiscal stimulus into the global economy, backed up by about $9 trillion in monetary measures from central banks as they attempted to put a floor under a global economy that suffered its worst recession since the 1930s.
The International Monetary Fund cited the co-ordinated action taken by governments, and the rapid rollout of vaccines, as the reason for lifting its forecast for the global economy at its spring meeting earlier this month. It now expects the global economy to grow 6 per cent this year, following a 3.3 per cent contraction last year.
The S&P500 has jumped in value by 10 per cent since the start of this year as US President Joe Biden's administration passed a $1.9 trillion stimulus package last month and is lining up a further $2tn package of infrastructure measures. But the huge increase in money supply means investors need to buy assets to serve as a hedge against the currency devaluation that will take place as a result.
They can do this by holding gold, or cryptocurrencies if they believe in them, Mr Mobius said, but he argued equities were the most suitable instrument.
"I like the idea of investing in company shares, in equities. The reason is that you are first of all investing in an asset that is going to be earning increasing amounts of money if you pick the right stocks, and you are investing in an asset which will hold pace [with], and should surpass, the devaluation of the currency," he said.
Valuation measures such as price-to-book, which price a company in relation to its asset base, are less relevant for asset-light companies like Google whose worth lies largely in its intellectual property, while price-to-earnings ratios become meaningless in an era of very low interest rates, Mr Mobius said.
"If you have an interest rate of 5 per cent, the reciprocal of that would be 20 – you could have a price-earnings ratio of 20 and that would be considered reasonable. But what happens if interest rates are 1 (per cent)? That’s 100-times p/e. And if interest rates are zero, p/e is out the window. So I advise people to not pay as much attention to that measure as earnings power and earnings growth," he said.
Mr Mobius is a former executive chairman of Templeton Emerging Markets Group, part of asset manager Franklin Templeton. He set up Mobius Capital Partners in 2018, which runs a Luxembourg-based open-ended emerging markets fund and an investment trust listed on the London Stock Exchange.
He also discussed "the inflation myth", which is the title of a book he published in October last year.
"The inflation statistics that we now use are very deeply flawed ... they do not reflect truly what is happening in the economy," he said.
"The most stultifying aspect of this is that these inflation statistics are being used to make very, very important policy decisions at the highest levels of government which are affecting millions of people."
He said that although prices are rising as a result of currency devaluation, efficiency gains, globalisation and other factors are increasing people's purchasing power.
"In terms of purchasing power, your ability to earn money is going up faster than the value of the money, so we’re in a deflationary environment," he said.
The rise of China has had an "incredible impact" on inflation, he said, leading to a continued lowering of the prices not only of goods and commodities but also services. The Belt and Road initiative, China's $1tn plan to develop trade routes across the world through building infrastructure across large parts of Asia and Africa, is also a "very, very good development", Mr Mobius said.
"So many of these countries need good infrastructure and the Chinese are coming in and building it at a fraction of what it would probably cost if Western contractors came in."
