Market conditions are likely to remain conducive for portfolios to remain ‘risk-on’ over the coming months, according to Skerritts Wealth Management, although investors need to be mindful that an extended period of difficulties might follow this. 
Investors are watching the US closely with many wondering when the world’s largest economy will tip into recession. The recent Bank of America Merrill Lynch Global Fund Manager Survey found that asset allocators are expecting economic growth to slow in the near term but seven out of 10 do not expect a recession until the second half of 2020 or later.
Andrew Merricks, head of investments at Skerritts Wealth Management, said: “Economists are notoriously poor at forecasting recessions accurately but we like to try to keep things as simple as possible.
When will the next recession start?
Source: BofA ML Global Fund Manager Survey, April 2019
“So, assuming that Donald Trump wants to win the next US election in November 2020 and that he knows that no US president has won re-election in a ‘recession year’ since 1860, our guess is that he will want to avoid the US from entering recession until after 2020 at all costs.”
He added that data is now beginning to support the view that global economic growth is likely to witness a bit of an uptick in the latter half of 2019, although this is based on backward-looking indicators.
“We prefer to try to look forward, which is why we’re happy, at this stage, to maintain a ‘risk on’ stance with our portfolios, but will be prepared to reign back later in the year,” Merricks said. “What we don’t particularly like the look of, however, is how this bull run may end.”
At the end of 2018’s third quarter, Skerritts Wealth Management was asking the question of whether “was 1998 in disguise”. Merricks added: “It turned out to be very, very like it.”
Last September, Skerritts Wealth Management pointed out that there had been currency crises in emerging market countries in each year, in addition to France winning the World Cup.
In 1998, the Federal Reserve had been in a rate rising cycle that was halted by a market correction. In 2018, the Fed was expecting to lift rates four times over the following year but scrapped these plans after the heavy sell-off.
Performance of global equities between 26 Jan and 25 Dec 2018 (in US dollars)
Source: FE Analytics
“What we said had happened in 1998, which had not yet happened by our September bulletin in 2018, was that the market had fallen by 20 per cent. Well, by Boxing Day, it had in 2018 as well,” Merricks said.
“The good news is that, if we are rhyming with 1998/99 (remember that history rhymes, it doesn’t repeat) then the year following the correction could be a good one. In 1999 the market rallied by over 60 per cent.”
While Skerritts Wealth Management is not expecting or forecasting a market rally of this extend, its head of investment pointed to recent comments by BlackRock chief executive Larry Fink.
“There’s still a lot of money on the sidelines, and I think you'll see investors put money back into equities. We have a risk of a melt-up, not a meltdown here,” Fink said in April.
Merricks continued: “Bearing in mind that the similarities between the two eras don’t stop there – the 90s bull market in the US was driven by technology stocks, whereas the current bull market is largely being driven by technology stocks – it’s what comes next that worries us.”
He cited recent research by FE Trustnet, which showed how there have been 11 sectors in the Investment Association universe that made a negative return for investors over a period of at least 10 years. Seven of these had their negative run start in 2000, after the bull run of the 1990s was ended by the tech bust.
What is “even more eye-watering” to Merricks is the scale of the maximum drawdowns that these sectors were hit with. The average member of the IA Technology & Telecommunications suffered an 85.5 per cent drawdown, for example, while the IA Global’s fall was 50 per cent.
Performance of IA Technology & Telecommunications between 8 Nov 2000 and 21 Sep 2016
Source: FE Analytics
“It is difficult to comprehend what the reaction would be should we witness similar drawdowns today, but the question has to be, why shouldn’t we?” he added.
“There are those who will scoff at the notion. ‘That’ll never happen,’ they’ll cry. Just as the technology sector could never lose 85 per cent in 2000; or the world’s largest banks couldn’t go bust in 2008; or Leicester City could never win the Premier League in 2016.”
The Skerritts head of investments pointed out that the past decade has seen money pushed into the stock market because of massive quantitative easing programmes combined low interest rates, inflation and bond yields. This makes it difficult for investors to determine what companies are truly worth.
“If bond yields rise, in which direction do equities head, and for how long, to re-establish the equity risk premium that should ordinarily exist over bond yields?” he concluded.
“As Dhaval Joshi of BCA Research reminds us, global risk assets are worth $400trn, five times the size of the global economy, yet if bond yields were to rise substantially ‘equity and other risk assets’ valuations would fall off a cliff’.”