Risk premium on US shares hits 40-year high, says Comgest

The combination of US equities exhibiting their highest risk premium for 40 years while ‘safe haven’ debt is “dangerously overvalued” leads French asset manager Comgest to recommend investors invest again according to fundamentals, not the fear that drove many since 2010.

The €13.5bn asset manager notes the risk premium for US shares is now 8.2%, a level not seen since the early 1970s, yet investors continue “grasping for income” at safe haven bonds at or near peak valuations.

“We regard equities as fundamentally very attractive, while in contrast, other asset classes – in particular German and US government bonds – are, in our view, strongly overvalued,” says Vincent Strauss, CEO and fund manager at Comgest.

Céline Piquemal-Prade, fund manager for global equities, says: “With dividend yields around the world now significantly above bond yields, we expect the equity markets to outperform over the next five years.”

Comgest’s managers point to signs of improvement in the global economic picture, such as re-expansion in America’s credit markets and corporate investments, and Chinese banks growing their lending, too – both precursors of rises in industrial production over the following months.

“We are in the second phase of an economic cycle in which companies are investing and hiring, and in which market competition is also intensifying,” says Strauss. “This leaves little room to expand margins. Earnings growth will therefore have to come from top-line growth.”

Comgest expects major companies it holds to report an 12% increase in their 2012 earnings – “markedly better than the global average of 10% expected for all companies”.

Laurent Dobler, portfolio manager of the Comgest Growth Europe fund, says: “Our European equity funds have been strongly outperforming the market for more than 18 months, following returns of positive 2% for 2011 compared to an 8% drop in the MSCI Europe index.”


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