- Stock-market investors could face “lost decade” of equity appreciation, Blackstone’s Tony James told CNBC.
- High returns, and “fear of missing out” buying has created a stock market that “feels fully valued”.
- Near zero interest rates driving investors into a stock market hungry for yield.
- Over the longer term, rising rates could undermine company earnings.
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Investors may not see the kind of returns the stock market has yielded this year for another decade, as companies struggle to grow their earnings in an economy that is in recovery after the coronavirus pandemic, private-equity firm Blackstone’s executive vice chairman, Tony James, told CNBC’s Squawk Box Asia on Wednesday.
James said that the healthy level of existing capital returns, plus the “fear-of-missing-out” buying frenzy that has driven US indices to record highs this year, has also created a stock market that “feels very fully valued.”
As interest rates eventually rise, in line with an improving economic backdrop, companies may face other headwinds in the long-term, and this could lead to disappointing stock returns for investors.
“I think this could be a lost decade in terms of equity appreciation,” James said.
Despite the S&P 500 experiencing its largest weekly decline since June last week, investors have once again returned to the stock market. The index is still up by more than 50% since hitting multi-year lows in March.
At the same time, US interest rates remain near zero, as the Federal Reserve leverages monetary policy to help manage the fallout of the pandemic that stripped over 30% off total economic output in the second quarter of this year and has rendered millions jobless.
Low interest rates and cheap credit have meant investors are hungry for yield and are still piling into equities and riskier bonds, James said.
"There's a hunger for yield, so investors are coming off the sidelines — there's still a lot of money on the sidelines, actually — and looking for investments that they can get some kind of returns," James said.
Interest rates won't remain low forever
Interest rates will likely eventually rise within the next five to 10 years, James said. The Fed has said rates will stay low for the time being. It has also said it does not intend to use negative rates as a means of fostering economic activity, unlike other major central banks.
Higher rates make it more expensive for a company to borrow, which will also affect its profits. James said a combination of rising interest rates and other headwinds, such as potentially higher taxes and operating costs, could impact earnings and result in disappointing equity returns in the long-term.
"All of that will be economic headwinds for companies. So I think you can have disappointing long term earnings growth with multiples coming in a little bit, and I can see anemic equity returns over the next five to 10 years," said James on CNBC.