Capital Markets: Observations and Insights Autumn 2019
Loving to Lend or Opting to Own?
“I would much rather own many common stocks than bonds.” – Warren Buffett*
The combination of interest rates declining to near historic lows and the never-ending news cycle attempting to guess what the Federal Reserve will do seems to have investors focused on short-term speculation. Such behavior appears to manifest itself in fund flows gushing into bonds and out of equities. However, U.S. equities have rarely been this cheap relative to bonds, as we detail in the following pages. Interest rates may have further to fall if the U.S. follows Europe and Japan, but we believe the upside is likely limited and the lower rates go, the more bonds are likely to underperform stocks over the long term. In this environment, we believe the choice between stocks and bonds is straightforward. In our view, equity portfolios comprised of companies with significant free cash flow yields and the potential for strong long-term growth are more attractive than Treasury bonds with miniscule yields and the prospect of no cash flow growth. While the herd of investors clamors to pay to lend trillions of dollars, therefore chasing bonds higher and yields lower, count us as contrarians and passionate equity investors who see the potential reward in high quality growth companies over the long term. We prefer owning to lending.
Daniel C. Chung, CFA Chief Executive Officer Chief Investment Officer
Brad Neuman, CFA Senior Vice President Director of Market Strategy
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