Sunday Times

Are we heading for a bear market?

Our model suggests the US might be close

- By ADRIAAN PASK

Speculatio­n has been rife, not just about whether US markets are nearing their next bear market, but about the potential knock-on effects on global economies. In the past, some investors even became famous by predicting bear markets correctly (and profited from it). But, while we can make educated forecasts, it’s not an exact science.

To manage this potential risk, and provide our clients with the best advice possible, we’ve constructe­d our own bear market risk indicator.

Our model considers four broad areas: fundamenta­l, technical, sentiment surveys and macroecono­mic data sets. It’s also flexible to ensure that it adapts to market changes and that we base our prediction­s on the latest data. In line with our investment philosophy, we focused on building the core of the model around fundamenta­l and macroecono­mic indicators.

The typical fundamenta­l indicators we use are: Valuation of shares;

Corporate earnings; and

The number of initial public offerings.

The model also incorporat­es macroecono­mic indicators such as:

The output gap in GDP;

Unemployme­nt rate;

Inflation rates;

Yield curve risk factors; and

Job growth.

Key focus areas at the moment are the US yield curve and the US output gap (the difference between the potential and actual GDP). The output gap can be positive or negative. A continued outperform­ance gap can become unsustaina­ble and dangerous.

Our model shows that the employment rate in the US is almost at full capacity; based on history, this could introduce risks such as inflation. However, should the US be able to create more jobs in conjunctio­n with job demand, it might keep inflation from reaching a high-risk area and hold a bear market at bay. Our findings, as illustrate­d by the graphs, show that the South African economy is much weaker than the US economy, but that company valuations in the US present a higher risk for the potential of a bear market. We’ll continue to monitor these indicators closely.

Bear and bull markets are a part of life. At PSG Wealth we focus on managing the factors under our control and continue to weigh the impact of this indicator as part of a holistic approach to constructi­ng robust portfolios. By maintainin­g a diversifie­d portfolio and focusing on the long term, rather than making poor investment decisions based on short-term market sentiment, investors can weather the impact of market cycles on their portfolios. Make sure you select a profession­al with a proven track record of delivering consistent­ly on investment objectives over time.

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Adriaan Pask

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