Stocks OK at 20 Times Earnings After Bond Rally, McCaughan Saysby
Low bond yields boost valuations, Principal’s McCaughan says
Turkey’s attempted coup make lower rates more likely, he says
Investors should stick with stocks even after the rally that pushed prices to 20 times reported earnings, the highest in more than six years, according to Jim McCaughan, who oversees more than $360 billion as chief executive officer of Principal Global Investors.
“You don’t need to worry too much” about higher-than-average stock valuations if Treasury yields remain low for an extended period, McCaughan said Monday in an interview on Bloomberg Television. “Maybe structurally that is OK, given the extremely low interest rates that appear to be likely to persist for quite a long time.”
Stocks are trading above their average valuation of about 16 times earnings in the past 10 years even as increasing global political turmoil threatens corporate profits. U.K. voters decided in June to exit the European Union, and Turkey repelled a coup attempt late last week. Such events have been increasing demand for the assets considered safest, such as U.S. government bonds.
“I don’t think Turkey does anything other than make that even more likely,” McCaughan said of the trend that’s pushing down bond yields. His business is part of Principal Financial Group Inc., the Des Moines, Iowa-based insurer.
The S&P 500 Index advanced 0.2 percent at 10:45 a.m. in New York and is on pace for a fifth record in six sessions.
The disruption in Turkey could, however, discourage bets on emerging markets, he said. Investors added more than $3.6 billion to exchange-traded funds that buy debt and bonds in those countries last week, a record in data going back more than two years.
“What this weekend reminds people of is that emerging markets have a lot of political risk,” he said. “That was kind of getting forgotten in the quest after yield, or in the quest after assets that had weakened. I think that reminder will actually have a broader impact on all the people who have become, perhaps, excessively bullish in the near term on emerging markets in the last few weeks.”
Turkey’s benchmark stock index fell more than 7 percent Monday.