Surging global wealth prolongs equity bull run
LONDON (Reuters) – Have money, will invest. Coffers brimming from strongly growing economies and buoyant markets, the world’s wealthy are providing fuel to history’s longest-ever equity bull run, lifting share markets to ever higher peaks.
The epic multiyear rally has sent world stocks to record highs more than 180 times so far in 2017, adding around $7 trillion to the value of MSCI’s all-country index. But far from calling a top, money managers who attended last week’s Reuters Investment Outlook summit, predicted even more in 2018.
Company earnings are growing at a double-digit clip, the investors argued, while central banks remain benevolent. And if share values are lofty, they are not yet seen as unreasonably so.
Undoubtedly true. But there is another potent catalyst as well – rising wealth and a swelling “savings glut” as the global economy expands.
Global wealth rose almost $17t. in the past year to $280t., Credit Suisse’s annual report said last week. Much of the new wealth is trickling into investment vehicles, including pension funds and sovereign-wealth funds.
From the record-smashing $450 million price tag last week on a Leonardo da Vinci artwork to a dizzying rise in cryptocurrency values, wealthy investors appear desperate for things to buy.
“There remains an extraordinary amount of money looking for things to do,” Luke Ellis, the CEO of hedge fund Man Group, told the summit in London. “[With clients], the conversation starts or rapidly gets to: ‘We have more money than we have ideas.’ Valuations are driven by more buyers than sellers.”
Equity funds worldwide saw total net assets rise by a fifth in the past year to more than $20t., according to Thomson Reuters fund research firm Lipper.
That may be helping to drive what Bank of America Merrill Lynch described as “capitulation into risk.”
The bank’s latest investor survey reported a record proportion of funds considered equities as overvalued even while overweight positions hit multiyear peaks.
“There is a lot more private wealth and saving that’s flowing into markets,” said Mark Haefele, who oversees around $2t. in strategies at UBS Wealth Management. “GDP growth over 6 percent in the world’s second-largest economy [China] produces an enormous amount of wealth, and that’s only one country.”
NOT EUPHORIC
But if demand is buoyant, supply of equity is not.
In fact, net supply was close to zero this year and last year because of share buybacks and weak IPO activity, J.P. Morgan pointed out in a note. Meanwhile, funds invested around $359 billion this year after accounting for reinvestment of dividend income, it said.
“The increases in demand... have had a strong impact on the equity market because of close to zero net equity supply,” J.P. Morgan told clients.
Haefele was among summit participants betting on equity gains in 2018. Equity sentiment among clients was not yet “euphoric,” he said.
Many dispute that the rally is flows-driven, arguing the key draw is earnings growth at rates that are smashing expectations.
Pictet Asset Management chief strategist Luca Paolini is in that camp. He says first, 16%-17% annual equity returns are “absolutely average” in a bull market; and second, the gains are only slightly outpacing earnings growth, which is running around 15%.
“The price-earnings expansion is just 3%,” Paolini told Reuters in a phone interview. “This is not a market driven by flows, otherwise PE would have gone up a lot more than 3%... this is a market driven by fundamentals.”
Arguably, one area of concern is technology, haunted by memories of the late-1990s collapse in sector shares after a period of exuberant valuations.
This year, US tech shares have risen nearly 40%, and firms such as Facebook and Google trade at more than 30 times forward earnings. Broader US stocks trade 18 times earnings, versus a 10-year average of 14.3, Thomson Reuters Datastream shows.
But the innovative, digitized nature of many modern firms means historical references may no longer apply, said Wayne Bowers, who helps oversee about $1t. at Northern Trust Asset Management.
“You can argue... the market does justify the high level of valuations,” he told the summit.
BUMPY 2018
‘There remains an extraordinary amount of money looking for things to do’
BAML called the early-November equity wobble a “dress rehearsal,” and indeed, some investors suggested 2018 could prove a “bumpy” one if central banks in the United States and Europe end up sucking more liquidity from markets than expected.
With the US Federal Reserve seen raising rates twice and the European Central Bank planning to halve bond purchases, the “monetary component” in the equity rally will diminish, predicted Pascal Blanque, who oversees €1.4t. at Europe’s largest asset manager, Amundi.
“From now, you can count less on this [monetary policy], meaning that earnings growth will prove even more critical, which for the moment is okay,” he said.