For more than five years now, global equities have rallied, led by the US stock market. Understandably, jittery investors are asking when the good times will come to an end.
Our answer? Not quite yet.
First, the end looks improbable for purely ‘technical’ reasons.
While trebling from a 22-year low in March 2009, the S&P 500 index has suffered setbacks from time to time, but none has lasted for more than a few weeks.
The maximum drop during the past three years has been 10 per cent, and after every decline the index has climbed new highs – a phenomenon which repeated itself in August when the index dropped 5 per cent, then recovered to set a new record.
Based on this pattern, the next drop is likely to be a few months away.
"Interest rates are set to stay low a while longer, making equities more attractive for investors than bonds"
The ample supply of cash at global fund management firms is another good reason for believing that the bull market has further to run. A recent survey showed that global fund managers have the highest level of cash holdings since June 2012.
What this means is that fund managers are under pressure to deploy the cash as the market rebounds from the latest drop – or risk underperforming the market as a whole. This lends further support to global equities.
But there is a much more fundamental reason to believe that global stocks will continue to rise: despite the economic recovery, interest rates are set to stay low a while longer, making equities more attractive for investors than bonds.
This was the unmistakable message when the world’s most powerful central bankers met for their recent annual meeting at Jackson Hole, the US mountain retreat.
Opportunities exist across markets
It is precisely this ‘Goldilocks’ scenario of steady economic growth paired with tame inflation which has fuelled the US bull market of the past five years, and which gives us grounds to believe the rally will go on.
A growing economy, with low borrowing costs, implies a steady rise in the earnings of US companies. It explains why – in the latest earnings season – companies in the S&P 500 index reported a 9 per cent rise in profits, beating analyst forecasts by a substantial margin.
In Europe and Japan, central banks are either easing policy or have pointed to the need for further policy easing. This should cheer global equity investors.
Lower borrowing costs were partly responsible for the 18 per cent surge in the earnings of European companies making up the Euro Stoxx 600 Index in the second quarter on this year.
"The global equity bull market has enough fuel in it to keep running for at least a few more quarters"
A savings glut in Asia only serves to make US and European stocks even more attractive. Shares in European companies are currently trading at a substantial discount to US stocks, and Asian stocks are trading at a discount to the developed markets in the West.
Against this backdrop, the global equity bull market has enough fuel in it to keep running for at least a few more quarters.
Occasional blips, like the one we saw in early August, should be seen by investors as a chance to top up their equity portfolios with stocks in the US, Europe and Asia.
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