We're stuck with an 'adult swim only' trading environment in 2016

You may not want to hear this but we’ve got to say this again: don’t expect getting outsized returns given today’s macro backdrop.

That’s according to the latest report by Henry McVey, head of global macro and asset allocation at private-equity firm KKR. He cited high P/E ratios for stocks, reflecting expectations of higher earnings growth in the future, and low yields on bonds, indicating expectations of low or negative inflation.

“In particular, we just do not see how traditional pensions, endowments, and individual investors are going to meet their historical returns bogeys in a world when $9.9 trillion of liquid fixed income instruments now have a negative yiel,” McVey wrote.

His conclusion is that 2016 remains a year of “adult swim only”, which he first coined in a January report. He had explained that today’s market conditions are like “swimming at the beach when there is a strong undertow that could pull a less experienced athlete out to sea.”

Global bonds yields are nosediving, and the anxiety is real. Thanks to negative yields, many investors are now paying governments for lending them money. The stock market was chaotic following the UK’s decision to part with EU, and the dollar became a safe haven. Central bankers are facing heightened pressure to stabilise the situation amid ultra-low interest rates, slow global growth and huge uncertainty.

Here is McVey (emphasis added):
Our indicators still point to the notion that we are later cycle, volatility is headed higher, growth versus value valuation divergence is extremely wide, and profit margins/returns on capital have peaked. To be sure, we feel better today than in January that the U.S. dollar will not restrict financial conditions as much as it has in recent years, but we remain increasingly concerned about the diminishing impact of monetary stimulus on economies around the world.

In other words, McVey views quantitative easing by central banks as increasingly ineffective at this point.
He thinks authorities are underestimating the negative impact of QE in developed markets and they may have gone too far with their unconventional policy tools.

Business Insider has examined why the
negative interest rate experiment has been such a failure, especially in the Eurozone.

With risk-free rates and low global growth rates, the chance of generating the same level of returns as they did in the past is low.

That echoes the grim outlook from the McKinsey Global Institute, which concluded the end of the “golden age” of stock market returns.

If those predictions run true, investors will have to think of more creative ways to get their desired returns.

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