Market analysts and fund managers are mixed on whether investors can expect the MSCI World index to hit new record highs this year or if it has peaked.
While the index is up by 3.48 per cent so far in 2018 in dollar terms, the benchmark hit its top on 26 January before falling 8.52 per cent. Currently the index remains 1.87 per cent below its peak, as the below chart shows.
Performance of MSCI World over YTD
Source: FE Analytics
Jason Pidcock, manager of the Jupiter Asian Income fund, said he believes that the index will not reach a new high again this year.
“Markets entered a period of heightened volatility on the 26 January, when we believe the MSCI World Index peaked for the year at just above 550,” he said.
“We have now seen a pullback in the markets and concerns about rising bond yields are negatively impacting sentiment.”
Yields for 10-year US Treasuries recently reached the psychologically important 3 per cent level, which could cause investors to start betting on interest rates rising again, the Jupiter manager noted.
Although a 3 per cent level would not be a problem necessarily for markets, rates increasing to 4 per cent would not be positive for equities.
“It would not just be higher yielding stocks that would suffer,” said Pidcock (pictured). “Low and non-yielding equities would likely struggle because debt/GDP levels are so high, which is why we believe yields will come back down reasonably quickly.”
While yields rising sharply from here would be a risk, the Jupiter Asian Income fund manager said it is unlikely, but the threat of it and the effect this will have on investor sentiment should keep markets subdued.
James Calder, research director at City Asset Management, said he prefers to look at market trends and would not make a call on the market as it can be “picked up on quite easily”. However, where the global equities index appears range-bound, he said investors should look to add active managers to their portfolio.
“Even if the market has peaked out and it goes into some sort of trading range, stockpicking managers outperform in that environment because the beta has gone and it is just the alpha you are looking for,” he said.
“If the market trended sideways then buying the index is obviously not the right thing to do. If a decent manager is giving you 300-400 basis points net versus the index that can still be quite an attractive level of return for the risk that one is taking.”
However, not everybody believes that the market is range-bound from here. George Lagarias, senior economist at Mazars Wealth Management, said markets still have potential to go higher, although it is not necessarily going to be at their pre-February trajectory.
“US earnings in Q1 surpassed 24 per cent (against original estimates of 10-15 per cent), but stocks barely moved, so the S&P 500, the steam engine for global stocks, is near its all-time high, but at much better valuations than at the beginning of the year,” he said.
“Whilst the fall in P/E [price-to-earnings] ratios could represent earnings finally fulfilling market valuations, corporate and consumer sentiment remain high and capacity constraints could return pricing power to companies.”
While central banks are more hawkish, signalling the latter stages of the bull market, Lagarias said it will have a greater effect on bond investors than equities.
“We don’t see any reason why asset allocators would abandon fundamentals just yet, especially as equity earnings yields and risk premiums are still much better than what bonds have to offer,” he said.
Hargreaves Lansdown senior analyst Laith Khalaf agreed that investors looking to take a call on the global equities index need to have a strong view on the US, which make up 60.26 per cent of the benchmark.
Chart of country weightings in MSCI World
Source: MSCI
“In the short term markets could move in either direction without defying the law of averages,” he explained. “The MSCI World Index is heavily dominated by the US however, so is perhaps more prone to a valuation-based correction than most.
“Having said that, the US economy is motoring along, and while interest rate rises could spook the market, they are actually a sign that the US can withstand more normal monetary policy too.”
From a technical perspective, Chris Beauchamp, chief market analyst at IG Group, said there have been a number of occasions that have been suggested as the market top, but that these have yet to come to fruition.
“History, particularly recent history, is littered with top callers, so at first glance I’m not sure why this one would be any different,” he said.
He added that any pullbacks recently have proven to be buying opportunities and there is little evidence that this should change.
“I still think dips throughout the year would mark buying opportunities,” the senior analyst said.
Like those above, he said the investors should keep watching the US for any sign of a recession, although at present one is not looking close with unemployment claims continuing to fall, retail sales rising and house sales remaining robust.
“Each of these tends to change direction before a recession, and there’s no sign of that yet. A bear market could still develop (trade wars being the most likely catalyst) but at present the macro fundamentals are good,” Beauchamp said.
Looking at the chart, the analyst said the S&P 500 suggests more gains are likely in the US, as trendline resistance from the all-time high of January was broken in early May.
Performance of S&P 500 since September 2016
Source: IG Group
“Weekly and monthly candles were a telling sign – each time we had a major selloff in Q1 the buyers stepped in, leaving those candles finishing well off their lows,” Beauchamp said.
“Crucially, the weekly MACD [moving average convergence divergence – a trend-following momentum indicator] has also posted a positive crossover, something that has happened three times before since the beginning of 2016, and was a bullish signal. This is still, in my view, a secular bull market.”
Finally, Premier Asset Management multi-asset fund manager Simon Evan-Cook said: “If it's possible to sit on a fence aggressively, then short-term market movements are one area we do just that.”
While he is constantly monitoring and assessing markets and discussing with investors across various markets, the manager said he has an extremely high level of certainty and confidence that he doesn’t know where markets will be at the end of the year.
“Markets are highly complex and adaptive, which makes them impossible to repeatedly predict correctly. This might sound like pedantry, but it's an important investment point,” he said.
“If we have no way of knowing where markets will be in six months’ time, then we shouldn’t base our investment decisions on those probably-incorrect views. We should, instead, work out what we can get right regularly, then keep doing that.”
Evan-Cook added: “The danger of predicting market direction is you can end up with the ‘guns pointing in the wrong direction’ situation.
“Even if you have good analysis and reason to put everything on one pole of a polarised view, simple bad luck can swoop in and cause catastrophic damage to your fund, or your investors' willingness to stay invested in it – often one and the same thing. Either way, in that scenario, your investors end up worse off.”