Since coming out of the 2008 global financial crisis, world equity markets have been in almost uninterrupted bull territory. Starting in 2009, the MSCI World Index has enjoyed six out of eight positive years, with only minor retractions in 2011 and 2015.
Over the last ten years, the index has returned 10.03% per annum. This is well above the long-term average of 7.28% per annum recorded since 1994.
This has been an unusual, and extended bull run. The result is that many investors are growing increasingly anxious about how much longer it can continue, and whether we aren’t moving ever closer to a major pullback.
However, speaking at the Glacier Navigate seminar in Cape Town this week, three experienced international fund managers argued that even though fears keep being raised about equity markets, investors should not be rushing for the exits.
“The animal instincts in the market remain pretty strong,”
said Marcus Brookes, the head of the multi-manager team at Schroders.
“There is a lot of bad news, but people seem to be willing to put that to one side and stay invested.”
The director of UK equities at Henderson Global Investors, Chris Burvill, said that he remains bullish towards markets.
“I think even the most begrudging bear would be aware of why markets have made the headway they have this year,” he said. “Because every issue that the bears have landed on as being their worries – whether that’s geopolitical events, a global economic slowdown, or interest rates rising – the equity markets have been able to rationalise and still move ahead.”
Burvill acknowledged that fund managers always run the risk of being proved wrong when they make these kinds of statements, but he doesn’t currently see the extreme levels of risk that some others are suggesting.
“I think it’s absolutely rational the way markets have performed,” he said. “There are those who say that equities are the most overvalued they have ever been, but I cannot see that.”
Kevin Johnson, the vice president of Dodge & Cox, was less committal on the future of the bull market, and suggested that investors need to approach equities with their eyes open.
“I have no idea what will happen in three, six or 12 months, but what I would say is that equities don’t look particularly cheap right now,” Johnson argued. “And over three, four or five years, we are comfortable to say equity returns are likely to be lower than they have been.”
This doesn’t mean that he believes the market is necessarily at a point from which it must correct. However, it is difficult to see how the returns of the last few years could be repeated from current levels.
“It’s really a function of the starting point,” Johnson explained. “It’s hard to argue that valuations look really cheap. We also think that earnings growth is going to be somewhat moderate, which suggests moderate returns of 5% to 8% for equities.
“We don’t think there is any large economic dislocation as we look out over the next few years,”
“It seems to us that most of the broader economies are stable to improving, and we don’t see any big collapse coming. Of course things can change, and so it’s not an absolute, but we do feel returns are going to be okay in equities.”
Brookes agreed that investors do need to keep some perspective.
“Are we at the latter stages of the bull market?” he asked. “I would say yes. Do I see markets doubling again from here? No way.”
However, Johnson did caution that even though it may not be imminent, investors do have to accept that there will be a correction at some point.
“Nothing goes up continuously,” Johnson said. “That’s part of being an equity investor. If you’re not able to handle that kind of volatility, then equities may not be appropriate for you. We have been in an unusual period where there has been a gradual, continual march upwards, and that is not the norm for equities.”
Patrick Cairns / 8 March 2017