Coronavirus delays Dow reaching 30,000, but should investors favor private equity returns?
As the global situation surrounding coronavirus rapidly intensifies, Wall Street’s march towards the Dow reaching 30,000 hits a major hurdle. But, coronavirus or not, there are more fundamental questions about the risks involved in investing in a hyper-inflated stock market.
Investing in a desert of value
In 1982, after baby boomers had come of age, they paid a 7 price-to-earnings ratio to buy the S&P 500. In 2020, the S&P 500 is trading around 19 times projected 2020 earnings, one of the highest in 40 years. Dow index companies’ metrics are sensibly identical.
While the US economy is strong and running close to full employment, the US budget deficit for this year is $1 trillion. We’re in the 11th year of the stock market rally, up 400% from the 2008 bottom.
“Right now, global bond markets are a desert of value with more than an equivalent of $17 trillion of sovereign debt having a negative interest rate.”
Several listed companies still offer a lot of value, but in this environment, good stock picking is essential to mitigate risks of investment losses. Indices are expensive, and the Fed’s and central banks’ expansive monetary policies have fuelled the market.
Right now, global bond markets are a desert of value, with a negative interest rate on more than an equivalent of $17 trillion of sovereign debt. At the same time, low interest rates mean several companies and governments with questionable balance sheets are not being exposed.
It appears that the coronavirus will result in a slowing global economy. The virus will certainly create supply chain disruptions in China and elsewhere, which may lead to real inflation and an ensuing tightening of the credit markets.
But whatever happens, some can argue that paying a forward multiple of 19 on stocks is starting to be expensive. Coronavirus or not, we should ask: ‘what is the upside of investing in public stock markets in view of the downside risks?’
The next pullback or crisis is never triggered by the same cause responsible for the one previous. For example, 2008 was largely caused by a banking system issuing too much debt to fuel the housing market. As a result, the banks’ balance sheets got cleaned up and the banking sector is now healthy.
“Coronavirus or not, we should ask: ‘what is the upside of investing in public stock markets in view of the downside risks?’.”
Central banks, however, absorbed a lot of the bad debts and issued enormous quantities of liquidity in exchange for a non-trivial percentage of assets of questionable value. Governments borrowed or monetized heavily thanks to low interest costs because they could.
In support of private equity returns
In a matter of days, the Dow Jones index has gone from approaching 30,000 and beyond to languishing a few thousand short. Investors, at this stage, should consider their options. These investments have binary outcomes, they are a two-way bet, with unjustified risk profiles and profit expectations.
Is it worth the risk to own Dow Jones shares at these levels when alternative investment routes can offer increased clarity over profit expectations and more realistic risk profiles? Increasingly, as the stock markets become further inflated, investors are opting to pursue opportunities through private equity style investments.
Private equity offers investors a chance to be involved in projects that have the potential to create real change and at the same time, offering huge upside potential and limited downside risk.
That’s because capital invested with first-class private equity firms is not at the mercy of stock market reactions to the extent of Dow Jones shares. Instead, teams of experts in risk mitigation, structure, and financial markets work with your capital to finance projects and create investment profiles as close as possible to one-way bets.
With coronavirus highlighting the stock market fragility, investors should continue to ask whether alternative routes are a more sensible option. To learn more about how Finance Technology Leverage provides investors with an opportunity to invest in some of the world’s most innovative projects, contact us today.
Christian is Director of Capital Development at Finance Technology Leverage. FTL is a private equity firm that invests in industrial technology, aerospace, energy, and life-sciences.