Fund managers are wrestling with an equity market that should be 20 per cent lower.
Utilities, real estate and technology stocks – sectors that normally do well in a bear market – have outperformed, while the emerging markets, banks and energy companies – the usual darlings of a bull market – have struggled. As equities trade near record highs, institutional investors have started to question whether the market is ignoring the risks.
“Any money manager will tell you that this has felt like the most bearish bull market,” said Alphinity Investment’s Lachlan MacGregor at Investment Magazine’s Equities Summit in Sydney. “It’s behaving like a bear market. If the market was 20 per cent lower we wouldn’t be talking about whether it’s complacent.”
This week saw the US equity benchmark S&P 500 Index forge a new record as investors shrugged off economic uncertainty that prompted the Federal Reserve to cut interest rates for a third time this year. The International Monetary Fund has also turned the most bearish on global growth since 2008 and Germany, Europe’s largest economy, is teetering on the brink of a recession.
And yet “the market doesn’t care,” according to MacGregor. He said that if you looked at where the market was today compared to a decade ago it was “almost unthinkable” that America would enjoy full employment, a deficit of 5 per cent, interest rates below 2 per cent and a benign inflationary environment.
“This shouldn’t be happening,” the portfolio manager said. “How do we get out of this? I’m not sure but that is what worries us. The reversal of quantitative easing and monetary policy is the biggest risk to the market.”
Pendal’s head of global equities Ashley Pittard warned that the tailwinds that have buoyed equity markets since the global financial crisis, including easy monetary policy and compelling valuations, were starting to become headwinds. He said investors should take a private-equity style of approach to their investments where holdings are typically more concentrated.
“Returns will not be similar in the next decade,” said Pittard, who helps oversee more than $100 billion in assets. “You need to be highly concentrated in stock picking because not all boats will rise in the (new) environment.”
UniSuper’s head of equities Simon Hudson told delegates later in the day that he expected to see “another leg up” in equity markets and added that the longest bull market in history “still has a way to go.” While First State Super’s head of growth assets Robert Cedaro, said he was a “bit more pessimistic” and expects to see gains of around 6 or 7 per cent in the medium term.