Even though the S&P 500 stock index is trading at a valuation that is almost twice the historical average, David Pinkerton, the chief investment officer of Abu Dhabi-owned Falcon Private Bank still thinks that there is room for growth, especially for technology companies that are likely to propel overall earnings growth.
That is because plans for fiscal stimulus in the US are likely to spur inflation, attracting investors to assets such as the shares in companies that tend to adjust to higher consumer prices. Furthermore, historical evidence has shown that at times of high inflation in US financial history, stocks gain more than bonds.
“There’s more fuel in the engine,” Mr Pinkerton said yesterday in an interview in Dubai. “There’s a higher probability that it’s ticking up than ticking down. But bull markets tend to end in euphoria. We’re not at a euphoric state right now. Everything is good, warm, positive. There are plenty of issues that prevent people from fully embracing [stocks] like North Korea, people are saying high valuations. And that’s all true but I think there’s a final chapter to this bull market that hasn’t happened yet.”
Mr Pinkerton said that the biggest risk at the present to further upward momentum in the bull market was the possibility of an escalation of hostility between the US and North Korea over the Asian nation’s spate of nuclear tests that have unnerved much of the world. Still, the investment officer said that history has shown that even in times of stress for the US, such as a number of wars, including the Vietnam War, that the S&P 500 did not grossly suffer and that it was a buying opportunity when the index fell.
Since the election of the US president Donald Trump in November, the S&P 500 index had been going from one record high to the next as investors anticipate promises of fiscal stimulus, such as spending on infrastructure and tax cuts, to be realised. The measure has gained 6.8 per cent year-to-date and 18.4 per cent over the past year. The S&P 500 is trading at a price-to-earnings (PE) ratio of about 25, higher than the average of the median ratio of 15.6. The higher the PE ratio, the more expensive a stock or index is.
The investment officer is particularly upbeat about technology and especially the trend towards digitalisation such as the use of Blockchain technology in finance and cryptocurrencies like Bitcoin. Such digital innovations have the potential to upend traditional business models such as middlemen in finance that take fees from the transfer of funds, he said. That would make such companies profitable, or at least the ones who survive become market leaders.
The investment officer said he thinks exchange traded funds (ETFs) are a good way to invest rather than making individual bets on companies that may not survive and that while an S&P 500 ETF is still a bet that he would overall favour, an exchange traded fund that is focused on US technology companies would be even better in his mind.
Switzerland-based Falcon Private Bank is owned by Aabar Investments, a unit of International Petroleum Investment Company, which has merged with Mubadala Development to form a new entity, Mubadala Investment Company.
mkassem@thenational.ae