The current global bull market will not last indefinitely, and there will be a downturn at some point. Economists and analysts are divided about when that will be and what the trigger will be, but tend to the belief that a crash will not come soon.
The US is experiencing one of the longest bull markets in recorded history, but one must remember its unique origins and drivers: the 2008 global financial crisis and the steps taken by governments to stave off total wipeout.
Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, says that although volatility is an integral part of investment markets, it typically increases during late-cycle bull market periods when global liquidity contracts and bear-market signals start to emerge.
“Bull markets don’t typically die of old age - in other words, they don’t end just because they have been in place for a long time. They normally come to an end once interest rate rises have been severe enough to constrain company profits via their negative impact on economic growth, and to have a detrimental impact on share valuations.
“In our opinion, this is, however, not yet the case. A recession in the US only looks likely by 2020 at the earliest,” Van Papendorp says.
In its most recent market-review newsletter, boutique asset manager Futuregrowth (a member of Old Mutual Investments Group), says a moderate global economic recovery remains its base case, with a sustained, strong US economic recovery still leading the way.
“Even so, we believe that the global recovery will continue to be structurally lower than in previous cycles, mainly due to lower productivity growth, ongoing balance sheet repair (governments reducing their debt levels), and shifting demographics (ageing populations).
“In the short term, we expect the tension pertaining to international trade protectionism to escalate mainly on the back of a worsening China-US trade dispute. Compromised global trade relations, coupled with higher crude oil prices, could become a larger drag on the global growth outlook than initially anticipated.”
The US Federal Bank’s process of slowly upping interest rates to “normal” levels is generating uncertainty, and this, Dave Mohr, chief investment strategist, and Izak Odendaal, investment strategist at Old Mutual Multi-Manager, say is behind the volatility.
“The Fed has been very clear for a while that rates would be rising, but at a gradual pace, as they have been since 2015. What has changed is that investors increasingly believe the Fed, having until recently doubted it.
"The Fed’s forecasts point to its rate hitting 3.4% by the end of 2020 from 2.25% currently. The two-year US government bond yield, which should closely reflect these expected rate increases, was only 1.9% at the start of the year. It is now a full percentage point higher. However, five years ago, it was only 0.6%, so much of the adjustment is already behind us. The 10-year bond yield spent most of the year around 3%, but shot up to 3.2% recently, before pulling back somewhat.”
The US unemployment rate, at 3.9%, was last seen “when Neil Armstrong set foot on the moon”. Therefore, higher interest rates are warranted, Mohr and Odendaal say.
Importantly, there is no sign of overheating in the US, they say, with inflation still “well-behaved” and wage growth still below 3%.
For the world economy as a whole, the outlook is still good, but somewhat less rosy, Mohr and Odendaal say. “The latest World Economic Outlook by the International Monetary Fund (IMF) shows that global growth in 2018 and 2019 is likely to be slightly below the April prediction. But the 3.8% real growth expected in both years is still solid compared to the preceding years. While the IMF warned about high global debt levels, interest rates remain historically low (even in the US) and borrowers are generally still in a position to service debts.”
Emerging markets and South Africa
Futuregrowth says the third quarter was particularly cruel for emerging markets, mainly due to negative news from Turkey and Argentina.
“This was in addition to the escalating risk of more international trade restrictions between the US and key trading partners, which may have potentially dire consequences for emerging markets if they come to fruition,” it says.
Futuregrowth says foreign investors responded by becoming large-scale sellers of emerging market bonds and currencies.
“In the case of South Africa, foreign investors sold R17 billion of rand-denominated government bonds over the third quarte.
“Although dwarfed by the sharp depreciation of the new Turkish lira and Argentine peso, the rand failed to escape the carnage - it depreciated by about 11% against the US dollar from the end of June to early September.
“The South African Reserve Bank resisted the temptation to hike rates, but it warned of the risks of higher inflation. This implies higher future rates, should inflation accelerate too fast for its liking,” Futuregrowth says.
Mohr and Odendaal note that the FTSE/JSE All Share Index is down 7.5% for the year to date, and longer-term returns have been dragged down. “However, a lot of bad news is now being priced into the market, and the current forward price-earnings ratio is at a five-year low, suggesting decent real return prospects going forward,” they say.
If you are investing for the long term, are well-diversified in your investments, and are confident that your money is in the hands of capable investment managers, the question posed at the beginning of this article should not concern you at all. If you start switching into safer assets such as cash, you are likely to get your timing wrong and lose out on a market rebound, as so many investors did in 2008.