"The term ‘bubble’ conjures up all sorts of things like the TMT collapse in prices. I think it is too emotive a term, so I certainly discount that.""I think it is true to say, though, that, when you look at a large part of the bond market trading at very low yields – core government bonds trading below 2 per cent; over 50 per cent of the non-financial corporate-bond market trading below 2 per cent – you would have to say that those parts of the market look poor investments and very poor value."
"There are other areas of the bond market that are still okay: financials still look very attractive, not just in terms of valuation but all the fundamentals, and the deleveraging that I have mentioned already, but also the fact that the capital base is shrinking."
"Banks are buying in their expensive debt at a rate of knots. In the last year, we have had something like 500 tenders retiring €251bn in the eurozone of bank capital, so it is a shrinking supply at a decent yield."
"There are, then, areas that still look attractive within bonds, but the safe-haven areas really look poor investments."
How do you rate more defensive stocks against more cyclical stocks? Are high-yielding equities now overpriced, as everyone clamoured for them in the search for income?
"I am pretty happy to have dependable earnings, but it all comes down to valuation: what you pay for it."
"A lot of defensive stocks do not look expensive at the moment. Given the pullback that we have had in those names relative to the cyclical areas, financials have done incredibly well, given this liquidity rush that we have had since the summer."
"Ironically, then, a lot of the defensive names look more attractive than they did previously, but it all comes down to valuation."
"High yield can sometimes be an illusion. My mantra is normally: buy a sensible yield that can grow. You are looking for good cash-flows and good dividend increases over time, which is a much more sensible paradigm."
High yield can be an illusion in the sense that it may not necessarily be sustainable?
"Correct – absolutely."
Are any of your fund managers actively looking to invest in the UK and/or European bank equities at the sector level? What are your views on bank debt, particularly subordinated debt, where some of your bond funds are exposed?
"A lot of things have happened in the banking sector over the last three to four years, and most of the changes that have happened have really been to the benefit of bondholders."
"There has been a tremendous process of deleveraging going on within the banks. They all have to shrink their balance sheets and get themselves in much better shape."
"For example, the recent RBS figures characterise this well. They brought their leverage ratio down from 28-times to about 15-times since the crisis, they have shrunk their balance sheet by £700bn, and they have taken their tier-1 capital ratio from four to 11."
"This is pretty typical of what UK and European banks have been doing. This is great for bondholders but not very good for equity-holders."
"Equity returns are still very subdued and we are only partway through the process, so it is still pretty difficult to see a bonanza period for equity-holders."
What do you think of US equity valuations at the moment? Will they pull back towards European levels? Is it possible that this is the start of a long period where you will want an increased exposure to the US?
"During this whole phase post-financial crisis, the US stock market has done very well."
"It has been the best performing of the major markets, for very clear reasons: not just a flight to dollar assets at a time of risk, but also the economic recovery and the better performance from US companies, so there are very good reasons for it."
"The valuation overall on US equities, in the very high teens when you look at the aggregate numbers, is probably in line with the long-run average and, on an EBITDA basis, half that level, so about average as well."
"You would, then, have to say the US market looks pretty fair value. I have to say, in terms of looking at what is interesting around the globe, there are other markets that look more attractive on a valuation basis."
"I think Europe has traded at a big discount for some time, despite the rally that we have had through the summer, given the obvious focus on the euro crisis, but also Japan, trading at very low historic valuations."
"When you look at the overall asset-allocation piece, there are markets that look marginally more attractive than the US, but the US looks okay."
Nick Mustoe is chief investment officer at Invesco Perpetual. The views expressed here are his own.