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Greetham: Why this bull market has another year or two to run

29 June 2017

Royal London Asset Management’s Trevor Greetham explains why the current bull market for both global equities and bonds could continue for up to the next two years.

By Jonathan Jones,

Reporter, FE Trustnet

The current bull run could last for as long as two more years as inflation and growth are beginning to wane, according to Royal London Asset Management’s head of multi asset Trevor Greetham

Macroeconomic factors have been picking up in recent months, with both growth and inflation indicators positive, but Greetham suggested this could reverse in the next few months.

He said: “We think there are two different cycles, the growth cycle and the inflation cycle and inflation lags growth, it falls and rises later.”

When looking at Royal London’s Investment Clock, such as the one below, the current climate is in the overheat section at the top right hand corner of the chart as depicted by the red spot.

Investment clock

 

Source: RLAM

“We’ve been in the overheat section for a while, which is why the Fed has raised interest rates, where inflation has been rising, growth has been quite strong,” Greetham said.

“Unemployment rates have been dropping and that is when central banks usually tighten monetary policy.”

However, the manager of the Royal London GMAP fund range noted that the 20-to-30 individual indicators that he uses to comprise his growth and inflation expectations have been pointing downwards in recent weeks.

“The indicators that we look at are actually suggesting that the pressure to raise interest rates is going to drop markedly over the next six months and that would favour bonds,” he said.

“Our growth indicators are getting weaker and our inflation indicators are starting to drop as well so you’re moving from the top right to the bottom left [of the Investment Clock].

“We think the next time we get together in three months from now we could be in the bottom left corner with growth beginning to cool off and inflation dropping.”

This would cause bond yields to remain flat and potentially fall further, having already reached historic lows over the last 18 months and result in a ticking up of equity markets.


Greetham added: “What they’re picking up is the rolling over of business confidence in America and more markedly in China and lead indicators generally starting to cool off.”

While growth is remains strong at the moment, these indicators are suggesting that as the year progresses the news will gradually get worse rather than better, he noted.

As a result, the red spot would move down the investment clock; what takes it right towards the ‘reflation’ portion of the clock is the lack of inflation in the market.

“The oil price is at a low again and the year-on-year impact of the oil price is turning the environment deflationary not inflationary,” he said.

“When you get a slowdown of growth and inflation dropping and that is a situation where if anything central banks want to cut rates or extend QE [quantitative easing].”

“At the moment that the markets are not positioned for that but this is why we hesitate when people say bonds yields will rise a lot in the next six months – they might actually drop quite a lot because of global considerations.”

Another way of showing this is through the graph below. The red line is the six-month change in the 10-year US treasury yield while the purple line represents the Investment Clock – Greetham’s growth and inflation indicators added to each other.

Nominal growth indicator vs 6 month change in US yields

 

Source: RLAM

He said: “The red line is on the left hand axis and when it is at 100 it means that the US treasury yield has risen by 1 per cent in the last 6 months and you can see we got that in Q4 last year.

“There was a huge bond sell off because growth and inflation was picking up but that is starting to roll over now.”

Meanwhile, the purple line is dropping quite rapidly, Greetham noted, which “suggests that at the moment bond yields are hanging in there but they could drop by 50 basis points or 1 per cent over the next six months”.


“And that’s something I don’t think the markets are positioned for and could cause some kind of eruption in the stock market as well as the bond market.”

Despite all this cooling off of both the growth and inflation indicators, Greetham does not expect there to be a recession.

Indeed he said that in America for example, unemployment is at a low of 5 per cent but wage growth has yet to pick up.

This is also the case in the UK and in Japan where there is very low unemployment but very little sign of serious bargaining power from the labour market.

This, he said, could be a cause of technological innovation or even perhaps workers who experienced the financial crisis in 2008 fearing the effects of a recession and just happy to be in a job.

“Over the next six months we do not see any major imbalances that say there is going to be a major recession and because there is so little inflation in the world, central banks if anything will give us the extra support to keep the cycle going,” Greetham said.

“We think the unemployment rate will keep dropping to 3.5 or 3 per cent and as a result we think there’s maybe another a year or two left in this bull market.”

However, he noted that when wage inflation does begin to rise in the US “this will give you the red flag for when a recession will occur”.

Greetham has managed the Royal London GMAP range of funds since 2016, having previously overseen the multi asset range at Fidelity International.

Performance of manager vs peer group over 10yrs

 

Source: FE Analytics

Over the past 10 years, he has outperformed his peer group by 26.66 percentage points.

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