Goldilocks remains seated in her right-sized chair tucking into a bowl of piping hot equities but the bears may have turned for home, the latest AMP Capital NZ quarterly market analysis suggests.
While global share markets were unlikely to experience “significant further upside” over the rest of 2017, the risk of a major market correction in the short-term appeared low, according to Greg Fleming, AMP Capital NZ head of investment strategy.
Fleming says continued dip-buying investor behaviour aligned with controlled monetary moves by global central banks indicate a period of “equity resilience” was ahead – with a ‘Santa Claus’ rally only a “distinct risk” if complacency sets in.
“This all adds up to a likely continuation of so-called ‘Goldilocks’ market conditions, where growth supports valuations because realized earnings come to justify markets’ anticipation of better profit news, disappointments remain in the minority, and inflation is sufficient to lift companies’ pricing power while remaining too tame to require an aggressive central bank policy response,” he says in the article.
Fleming says while technical measures of US equity market valuations are at the dangerously high levels previously seen before various historical crises, this time it is different.
“While these current valuations are somewhat concerning, a key difference between conditions prevailing now and those of 1929 and 1999, is that equities are not the only expensive asset class,” he says. “Rather, low interest rates have engendered broad overvaluation across a wide range of investments, from property to shares to lower-rated credit instruments. This ‘bull market in everything’ (as The Economist calls it) creates an unusual lack of alternatives to use as diversifiers.”
However, a number of factors, including brewing pressure in the US corporate debt market, could see equities finally tip downward in the medium term.
“Given the lead times and the fact that equities are still seen as less expensive than bonds, it may well be that a significant and sustained drawdown period (a bear market) could still be more than a year away,” Fleming says. “We are of the view that there are probably insufficient catalysts on the horizon strong enough to turn the bull in the immediate future, but that 2019 is likely to see problems emerge that could hasten termination of the current expansion.”
A “China-centric credit shock”, though, could end the equity party early, he says, triggering buying opportunities for AMP Capital, which continues to hold a reasonable arsenal of dry powder.
Cash and currency represent two of the fund manager’s three overweight positions (with ‘alternative growth’ assets such as infrastructure, the third).
AMP Capital favours cash for crisis management, arguing the traditional “save-haven” role of fixed income during share crashes may not play out in the current expensive bond market.
“We would contemplate lowering our cash allocation in the event of compelling value emerging, but not simply in order to take on more investment risk in the hope of squeezing marginal additional returns from still-expensive markets,” Fleming says.