A crash is coming, but it's not the end of the bull market, says Chris Watling

"There's been a lot of demand for money - the corporate sector's issuing a lot of debt, demanding a lot of cash and that's pushing up rates across the yield curve. I think we're coming to the end of that phase and we're entering a chapter where we reset on risk assets."

Watling says these periods come around every three or so years, and this one won't mark the end of the current equities rally. 

"I don't think it's the end of the bull market," he says. "I think it's a chapter. Maybe we're in chapter three of a six or seven chapter bull market. I think there's a good two or three years out there."

"So even though hyperscalers are spending a lot of money, the economy as a whole is generating a lot of free cash flow," says Watling. "And that's not what happens at the end of cycles or the beginning of bear markets."

Excited and concerned on AI

"I'm very excited about AI technology," he says. "I'm concerned about what it's going to do to labour markets and the displacement of labour, but I'm very excited because it also seems to me like we are genuinely in another industrial revolution." 

"We are going from agricultural to industrial in the modern day sense of the term. And I think there have been enormous amounts of displacement of labour over time, which will drive a lot of productivity growth, which is ultimately wealth creation."

While much of the market discourse has been dominated by capex and profitability concerns, Watling is also concerned with the wider political and socioeconomic impacts.

"The challenge for politicians is how you manage the pieces of the pie and ensure the pie is divided and doesn't just end up with all the gains accruing to a few."

But the near-term outlook for markets is still positive, he says, with more potential upside to come. 

"We're at the picks and shovels stage. We haven't got to the stage where it's dispersing into the rest of the economy in a big way. And the stock market I think can keep pricing in some exciting outcomes."

"If you break down the volumes in the US market, it's 30% hedge funds and pod shops," says Watling. "That worries me because they're basically stop-loss guys and momentum traders. Then it's 20% retail. Some people say it's now the clever money. I don't buy that at all."

"It's 42% passive, which goodness me, how does that work in a bear market?" 

"There's just 7-8% active investors out there. Active investors used to be the ballast in the market and they're no longer a factor in that. They're not big enough. So I think that's a really big risk to think about, and that's a market structure dynamic where there really has been a major change over the last 15 years."