Little sign of bull market peaking yet

WITH equity indices hitting all-time highs, many people are asking whether or not now is the time to take some profits – after all, we are perhaps due a correction. What might be the trigger? We don’t subscribe to the view that bull markets “get tired” or “die of old age”. There must be a catalyst. Since the “taper tantrum” of 2013, all the equity markets’ major setbacks have, in our opinion, been the result of growth scares. However, a growth scare does not appear imminent.

Global Purchasing Manager surveys continue to tick higher against a background of reasonable reported growth.

In terms of the current US economic expansion, this might be the third-longest since the Second World War, but the two longest ended with Gross Domestic Product on average 36 per cent above the previous cycle’s peak. The current cycle has been very shallow, leaving the economy just 12 per cent above the 2007 peak.

China’s economy will remain a perennial source of concern to bears, and it remains likely that housing data will turn negative on a year-on-year basis sometime soon. However, this will not portend a major recession, and, if anything, we believe that President Xi’s continuing consolidation of power will enable him to carry out more positive reforms. What about interest rates? All eyes are on the Fed. The Fed Funds rate will inevitably rise this year, the only question is, how many times?

So far markets are comfortable with this “normalisation” process as it reflects the fact that growth is sound and the system can bear higher rates, reflecting the ongoing recovery from the financial crisis.

Geopolitics remains a threat, but hard to predict. “Bad Donald” and a Marine Le Pen victory in France constitute real danger, but more “Good Donald” and an “anyone but Le Pen” winner suggest support for reflation.

Other threats include a flare-up in the South China Sea or North Korea, but these are unpredictable from a timing perspective.

Momentum remains positive. John Wyn-Evans is head of investment strategy at Investec Wealth & Investment