Indeed, the first “red flags” are being seen in developed Anglo-Saxon markets, Ralph Jainz who runs the Halkin Wittenberg European Small & Mid Cap Fund at Halkin Asset Management told CNBC at the Investors’ Choice Awards on Thursday evening.
“We find less and less pockets of mispricing and undervaluation. Expectations are very high – probably by now unrealistically high. We are coming to the mature end of the cycle. We are seeing the first warning signs and red flags,” he observed.
Jainz pointed to credit availability in the U.S., particularly highlighting flagging lending dynamics in commercial and industrial loans as well as auto and household debt. Given the U.S. economy is poised for a series of interest rate hikes, Jainz noted his concerns about the outlook for ongoing demand dynamics, particularly given the boost demand has received for many years on the back of cheap financing fuelled by generous central banks, which may have had the effect of artificially “bringing forward” demand rather than creating a wholly new source.
“If there is any demand destruction coming from that then we would probably look at the very tail end of the current economic bull market in equities and as far as we are concerned valuations are really already so stretched, already the risk is sincerely asymmetric – i.e. weighted to the downside – there may be another 5-10 percent on the upside if valuations overrun,” he said.
While Jainz believes it is still too early to start shorting too aggressively given expectations for a buoyant first and second-quarter earnings’ season, he believes over the course of this year, more returns are likely to owe to short positioning than long.
“We’ll probably reach the point of not only maximum euphoria but also in terms of the estimates for revenue and earnings growth for the years to come,” he opined, before outlining what could lie beyond the summer.
“As interest rates rise it is almost impossible to assume that there is no effect on demand and potentially demand destruction … [also if that] bringing forward effect ultimately leads to a sharper deterioration, the slowdown could actually be quite rapid,” Jainz cautioned.
