Equities are definitely cheaper than bonds, according to Deutsche Bank Private Wealth Management's Klaus Martini and Benjamin Pace, who spoke Wednesday in New York at the firm's semi-annual press briefing. "Price/earnings ratios (or price-to-yield ratios) for bonds are 24 or 25 times [interest payments]," said Pace, chief investment officer for the firm's U.S. investments operation.
That figure compares with 14 to 15 times earnings for U.S. stocks and 12 to 13 times earnings for European equities, both of which offer investors far more upside than U.S. Treasuries. However, both Pace and Martini, the firm's global chief investment officer, predicted financial markets would remain volatile for at least another three months or until some clarity appears regarding the subprime loan crisis.
"We will have choppy markets, but not bad markets. The next two quarters will be dominated by subprime news," said Martini. "Bond prices have already priced in a recession," and he says the odds on the Big R are approaching 50%.
Still, Martini noted that while the days of big swings in the business cycle are over, the world "will see more and more [asset] bubbles. Rarely do we know we're in a bubble and if we do, we don't know when it will end."
But whereas financial markets looked a decade ago to the so-called "Greenspan put" to set a floor below which prices wouldn't fall, and more recently to private-equity funds to play a similar role, the torch may be passing to sovereign funds coming from places like China and Abu Dhabi. Indeed, Abu Dhabi's sovereign fund has $800 billion to invest, so its $7.5 billion investment in Citigroup amounts to only 1% of its total assets.