Investors shouldn’t try to stand in the way of the bull market’s final surge, according to IG Group’s chief market analyst Chris Beauchamp, who points out de-risking now could see them miss out on the most lucrative part of the rally.
The current bull run and period of economic expansion are the longest on record, which has led many commentators to warn we are due a recession and correction.
Performance of index in current bull run
Source: FE Analytics
However, Beauchamp said that this is quite an arbitrary way of looking at it, adding that people have been trying to call the end of the bull run for a number of years now. He said it would be better to follow the advice of Citigroup chief executive Chuck Prince, who said that “as long as the music is playing, you’ve got to get up and dance”.
“You could justifiably say that things have gone too far now and sit it out,” Beauchamp explained. “But if you are managing money for investors, and you ignore the market while it goes on another 10 to 15 per cent or more, they would probably be rather unhappy to say the least.
“I think that the risk of calling the end of the cycle or of being late in the cycle is that often the strongest gains come right at the end. And if you are declaring your intention to sit out now, you are going to miss out on those gains.”
“It could be much more volatile, I think 2018 was a much more volatile year, but it came off the back of an ultra-quiet year as well. It is just investors’ perceptions are distorted to some extent.”
Performance of index in 2018
Source: FE Analytics
It is not just the length of the current cycle that is giving investors cause for concern. Economic data is currently weak and in an article published on FE Trustnet yesterday, Ariel Bezalel, manager of the Jupiter Strategic Bond fund, said he was of the belief that, “considering everything we are seeing from a fundamental perspective, we are getting closer and closer to the end of this cycle”.
However, Beauchamp said this is typical of the polarised way in which many people look at markets, when in fact, like with so many things in life, the truth is somewhere in between.
“You live in a world where growth either has to be quickening in pace or slowing in pace,” he continued, “and I think that people assume because something is slowing in pace in a sense it is a prelude to something far more dramatic.
“The reality is we live in a world of steady but unspectacular growth, particularly in the US, but even in the eurozone and Japan. It isn’t going to generate fantastic increases in economic growth, but it is going to deliver the goods over the course of time.”
Beauchamp said that last year’s winter correction was the perfect example of this. He pointed out that by the end of December it was obvious that equity markets had dramatically over-reacted to the Fed’s tightening programme and signs of potential trade wars.
“And then there was an equally dramatic rebound on the basis that the fundamental factors that have driven this bull market – rising earnings, a stable economic environment, accommodative monetary policy – they were still there, and maybe people just got fixated with what the Fed might or might not do.”
John Ricciardi (pictured), chief executive of Kestrel Investment Partners, is even more optimistic. The manager uses proprietary models to predict macro trends – including worldwide GDP growth, inflation, available liquidity and interest rates – and bases his allocation on these results
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His models suggest a variety of indicators such as factory orders and house sales will reaccelerate around September to October, boosting equity markets.
“We’re not far away. We’ve got [six] weeks before all this stuff really starts to thunder in real time,” he explained.
“Everybody’s talking about the world cycle, going back to the recession Fed rate, but then we’re going to get a turn and the cycle will jump within three months. How cool is that?”
In terms of individual sectors, Beauchamp said that if the current period of wage growth continues to pick up in the US and UK, this would favour luxury brands over the more basic end of the market, “and more travel perhaps”.
He also said that if there is any more stimulus in China, the miners could be an attractive play.
“They have done so well over the last few years,” the analyst added. "There could be a lot more in that tank as well. It is hard to find anything in the FTSE that really offers a lot of growth, but I think that is one area that has room for it.”
Beauchamp is not completely relaxed about macro threats. He said that if anything has the power to do real damage to the equity market, it is an escalation in the trade war, warning that once US president Donald Trump is finished with China, “he will be going after the Europeans”. The analyst added that anyone hoping for a near term resolution is likely to end up disappointed.
“Certainly, in the first half of this year, we thought there would be a trade deal done by May, as you would want to get that out of the way before the elections,” he explained.
“But we thought that in the middle of last year when he had the mid-terms and we thought it would make sense, a sane person would want to get this deal done by the mid-terms, claim a win and move on.
“It is not his dynamic, he is much happier to play to his base in that sense and say he is going in to battle against China.”