Equities: Can asset managers really spot the end of a bull run?
Not yet. Not quite yet. Still not. Almost. Could be any minute. But not yet. Was that it, just then? Don’t think so. Or was it?
That is the trouble with equity bull markets: you never know precisely when they have ended, until several months after they have.
Take the current bull market, which has been running since March 9 2009. It might have ended on October 10 this year. But, writing this on October 15, I do not actually know. And reading this on November 30, nor do you (yes, FT Wealth production schedules are almost as long as some investment cycles).
So why even bother trying to spot the end of it? Two reasons. First, the collapse of a bull market into a bear market — defined as a 20 per cent fall in an equity index — tends to deliver losses quickly: the 25 US bear markets since 1929 took an average of only 10 months to knock an average of 35 per cent off share prices, according to financial website Marketwatch.
Second, the continuing bull market is already a historical anomaly: the S&P 500 is now on its longest bull run, having overtaken the previous record on August 23, at which point it had returned 386 per cent in US dollar terms, according to investment service Willis Owen. That is assuming it is continuing. Which it might not be.
Any asset manager able to spot the end within a month or so — and keep your portfolio invested up to that point, but not beyond — can therefore truly add value. But can they do it?
Plenty claim to see warning signs of a market near its top. After the S&P fell 3 per cent on October 10, Mitsubishi Bank noted that the recent spike in mergers and acquisitions was like that seen in pre-crash eras 1999-2000 and 2006-07, while the Investors Intelligence bull/bear index was at levels last seen just before the 1987 crash.
Several wealth managers, however, are willing to be much more precise about when the end will come — and why it is not now. Or even by the time you are reading this.
“By definition, one knows the top of the cycle only once it has peaked,” admits Alexandre Tavazzi, global strategist at Pictet Wealth Management. But he immediately adds: “Nevertheless, we do not think this is the top.” Instead, he sees only a reaction to higher US interest rates. Corporate earnings growth looks good for another 12 months, he reckons.
Pascal Blanque, chief investment officer at Amundi, Europe’s largest asset manager, agrees. Referring to the October wobble, he says: “It’s just a market correction, rather than the start of a prolonged bear market. We’ve seen signs lately that markets are having a hard time with rising interest rates.”
Ask Fahad Kamal, chief market strategist at Kleinwort Hambros, if this is the end and he is definitive: “No.” Fortunately, he also provides some context: the S&P “is down about 7 per cent from a record high set just three weeks ago [in September]; it is still up year-to-date. More importantly, the major cause of angst at present . . . is rising US government bond yields. However, those yields are rising because of a white-hot macroeconomic backdrop, a good thing.”
For him, the important number is US inflation, which was down in September, to 2.2 per cent from 2.7 per cent.
Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham, believes this moderate inflation, a strong US housing market and global earnings growth should help the bull market “power on” — even if we are “well advanced into the cycle”.
One wealth manager can even tell you when the cycle turns. Yogesh Dewan, chief executive of Hassium Asset Management, says: “The developed market bull run will end in the latter stages of 2019.” So not now. But then.
By definition, one knows the top of the cycle only once it has peaked
Are all wealth managers so sure of their timing, though? There appear to give off warning signs. Katie Nixon, chief investment officer of Northern Trust Wealth Management, does not see a bear market on the horizon, but does admit to creating a “Portfolio Reserve” for clients: a discrete portfolio of cash and short duration bonds that can “act as both a buffer and a funding source should risk asset markets correct significantly”. Not that they will. At least not yet. Similarly, at Pictet, Tavazzi may not see the top, but admits he built some protection into portfolios ahead of the October correction.
David Baker, head of the wealth management division at Mazars, even sees the possibility of a final equity market rally — but admits he has been rotating into short-dated gilts and short-dated corporate bonds. He is not the only one aware that what goes around comes around: Blanque at Amundi admits to “rotating towards the more defensive spaces of quality and value on the equity side”.
Only Messers Kamal and Dewan appear fully confident of their timing — adding equity risk to their client portfolios.
Which of these wealth managers will be proved right? Surely it is obvious. Just not quite yet.