“I think this could be a lost decade in terms of equity appreciation,” he said, referring to a term commonly used to describe a period in the 1990s when Japan experienced economic stagnation.
He explained that current low interest rates may not dip further and may instead rise to more normal levels in the coming years.
Higher interest rates, in many instances, tend to negatively affect corporate earnings and stock prices. High borrowing costs will eat into company profits and hurt share prices.
In addition, companies will face “plenty of headwinds” that put pressure on earnings, he said. That include higher taxes, increase in operating costs, less efficient supply chains and “deglobalization” that will hurt productivity, explained James.
“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,” he added.
Near zero interest rates drive markets up
Despite the severe economic hit from the coronavirus pandemic, U.S. stock markets have climbed higher after plunging in March.
James attributed such momentum to the Federal Reserve bringing interest rates down to near zero, which left investors hunting for yield with few options to park their money. That’s why investors are piling into riskier bonds and stocks, he explained.
“Zero interest rates is the driving force here, near zero interest rates,” he 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,” he added.
While that resulted in stock markets that are “fully valued” and “a little ahead of itself,” the U.S. central bank deserves credit for preventing what could have been a “major meltdown,” said James.
“The Fed move was unprecedented size and speed … without that, there was serious risk of spiraling down to a kind of depression and when you start having that credit problems, it will ripple through markets very quickly.”