Following the falls in equity markets globally across October and November, there’s been a marked increase in bearish commentary from fund manager, analysts, and various other commentators. But as the saying goes, there’s two sides to every trade, and this is no exception. To balance out the panicked shouts, there’ve been plenty of high performing fund managers calling for calm. Some because they’re not interested in the macro picture, and others because they don’t think the current environment is concerning. I don’t intend on telling you who’s right or who’s wrong; I’m no arbiter of truth, nor can I predict the future. Instead, I’ve collected and summarized the views of some of the best in the business to help you decide for yourself.
The bull case
The bulls are generally a bit quieter at the moment, but there are still plenty of them around if you’re looking for them.
Mary Manning, Portfolio Manager for Ellerston Asia, thinks we’re unlikely to see a major bear market like the GFC or the Tech Wreck.
“My view is that this is not one of the big corrections. This is not GFC 2.0, this is definitely not an Asian crisis. We have checklists, we go through the bear market checklist and if you look at some of these big corrections like the Asian crisis or Tech Wreck, there are a lot of things that characterise the markets prior to these big corrections.
For example, there were extreme valuations, there was certain corporate behaviour, like IPOs and lots of M&A, the sentiment was euphoric – it was all ‘love’ and nobody thought about risk. Cash levels were very low, balance sheets or corporates were stretched. We have a checklist of 10 things, when you go through them, the market right now is not checking a lot of those things. To me, this seems more like a taper tantrum plus a trade war sort of correction. Which means, in my view, we’re closer to the floor than we are to the ceiling in this correction.”
Gina Martin Adams, formerly Managing Director and Equity Strategist at Wells Fargo, and now Chief Equity Strategist at Bloomberg LP, is not quite so quick to say we’re near the bottom, but still only sees two “unfavourable” items on her checklist of eight. Currently the unemployment rate, yield curve, cyclicals vs defensives, and high yield spreads all remain positives for the equity markets.
Paul Taylor, Head of Australian Equities at Fidelity International, is pretty sanguine about the Australian market and economy. Despite fears of a housing-led recession, he says “there doesn’t appear to be any short-term catalysts that would cause a major market downturn.” While he acknowledges the trade war is a concern, he says that “it’s unlikely however this would cause a major downturn in its own right.”
Importantly, he sees good relative and absolute value in the Australian share market:
“While the Australian equity market appears good absolute value, it’s a stand-out in terms of relative value against other asset classes such as cash and bonds due to earnings and dividend yield.”
The bear case
The bears have been loud, grizzly, and numerous since October. Whether or not they’re right remains to be seen. It’s only with the benefit of hindsight that we’ll know for certain.
Quantitative Easing and record-low interest rates have driven valuations to high levels. This tailwind is now over. Quantitative Tightening (the reduction of central banks’ balance sheets) began in October.
Charlie Jamieson, Chief Investment Officer at Jamieson Coote Bonds, doesn’t pull his punches. If you’ve read or watched any of his commentary on Livewire recently, you’d see that he’s firmly of the belief that things are getting very rough in credit markets.
Though Charlie doesn’t comment on equities, in my view, it’s hard imagine a situation where a major dislocation in credit markets coincides with rallying equity markets.
“Credit is smouldering right now. When that smoke becomes fire, the door becomes a key hole and only the first few get through. The rest get burnt. Holding credit risks with your equity holdings into 2019 and 2020 seems mighty dangerous.”
“Today's equity markets are increasingly showcasing the main characteristics of a bear market.”
Rudi is adept at reading market sentiment, and what he’s reading doesn’t instil confidence.
“Trading activity inside the Australian share market very much resembles that of a genuine bear market. Bad news is being punished without recourse. Good news might trigger a share price rally, but that subsequently becomes a source for taking profits and raising more cash. No news can mean anything, but most likely the stock is being sold off on flimsy correlations and spurious projections.
On some days, nothing really matters. If your stock is listed, and widely owned, it will be sold, simply because other shares are too. No room for exceptions.”
Dr Jerome Lander from Procapital is an asset allocation specialist. This essentially means that he advises institutions, financial planning firms, and wealth management firms on which asset classes and fund managers to invest in. His current views seem to suggest that being overweight equity risk is a dangerous place to be, and advocates for cash and alternative investments.
“There is (arguably of course) a bubble in nearly every mainstream asset class. A bubble in debt markets, a bubble in property, a bubble in equity, a bubble in private assets, and a bubble in the way portfolios are managed. This is an artificially created result of easy monetary and fiscal policies that have been employed by global governments for many years now in an effort to boost asset prices (successfully). These policies appear unsustainable in the long term.
Unfortunately, we are probably already in a long overdue equity and credit bear market in the US – and if not - there is a large probability of it not being that far away (within a year or two). We are almost certainly in a bear market in Sydney and Melbourne residential real estate! We define a bear market simply as one which is more likely to lose you money (in real terms) than make it.”
The “I don’t care” case
Humans, both individually and collectively, are pretty bad at predicting the future.
“It’s Difficult to Make Predictions, Especially About the Future”
Versions of this quote have been attributed to Yogi Berra, Neils Bohr, Mark Twain, and many others. Regardless of its source, it emphasises a fundamental truth about the world we live in: it’s more complex than our minds could ever hope to fully grasp. With this in mind, there have been plenty of people calling for calm, not necessarily because they think the markets will be fine, but instead because they accept that they can’t predict them and therefore shouldn’t try.
John Garrett, Managing Director at Moelis Australia and author of MastersInvest.com says that long-term investors probably shouldn’t be too concerned about the current noise.
“It’s more than likely the world will continue to move ahead, and October’s sell-off will be a blip in a long-term chart that moves from the bottom left to the top right. That’s been the trend over the long term and it is likely to be the trend in the future too.
You needn’t worry about short-term blips if you maintain a long-term view, provided you buy high-quality companies and don’t pay lofty multiples for them. These are companies with strong balance sheets, widening moats, high returns on equity and track records of profitability.”
Aaron Binsted, Portfolio Manager at Lazard Asset Management, says that timing the markets is “almost impossible”, and reminds investors that some of the biggest up-days occur in the midst of market turbulence.
"When market and economic environments are less certain, investor return expectations can become difficult to manage. Individuals in such periods can make quick, impulsive decisions based largely on emotions and leave the equity market at the wrong time.
Equities can still play a key role in volatile markets. Successfully timing the equity markets is almost impossible. Many studies have shown that just missing the five best days in equity markets over a year will have a dramatic impact on your overall return. In addition, history shows that many of the biggest one-day upswings occur in the midst of turbulence.
We argue investors need a long-term equity allocation for inflation protection and growth opportunities. Traditional options, like term deposits, bonds, and residential property do not offer enough income to keep pace with cost of living pressures. Equities can over the long-run make a much more attractive source of income.”
Warren Buffett is a man that needs no introduction, but it would be remiss of me to talk about ignoring the macro noise without including a Buffett quote.
"We look at opportunities, as they come along, we try to figure whether we can understand the long term economic prospects of the business. A lot of times the answer is no, then we forget it. We are not making any judgment about where the market is going or we are not looking at any macro factors.
My partner Charlie Munger and I have been working together now 55 years. We've talked about every business you can imagine and stocks. We have never had one decision that involved a macro factor. It just doesn't come up."
There’s no real right or wrong answer here, or at least not one that can be seen without hindsight. As always, it’s important to understand your own strategy and approach to investing and stick with what you know. A clear, well defined strategy (ideally, in writing) can be a valuable tool when the going gets tough.
Let us know in the comments what your views are; do you fall into one of these three camps, or is there another point of view that we haven’t covered?
Hi Patrick, the state of the market is of interest , of course, But, at the end of the day I invest in companies, and as such, expect results from them, NOT the market. Eric Wells
Actually, Patrick, this comment is for you personally. As you know, I LOVE Livewire. Before I retired, I spent some 35 years in retailing, with Target, Coles, and lastly E&S Trading. My portfolio is heavily weighted towards retail. As such I have progressively bought into City Chic, and it is now a big part of our portfolio, numerically. I have a lot of faith in the management, and think they will do very well in a niche market. Cheers, Eric Wells
I think there is possibly a case for optimism, at least when it comes to Australian stocks. When I think of the current tariff face-off between the US and China, I am reminded of a passage in a book about a stock trader named Jesse Livermore, who was active about a century ago. Livermore was one of the most famous stock traders in the United States in his day, and his early-career experiences were serialised by a journalist by the name of Edwin Lefevre, who interviewed Livermore in the 1920s. These were republished as a book shortly afterwards. One chapter in this book describes the phenomenal stock market boom that took place in the United States during the early years of the First World War. In 1914, at the outbreak of hostilities in Europe, the US government shut down the stock exchange, but trade resumed in December, and a surge in the Dow Jones was to follow, up a massive 70%+ before the end of 1915, and this in an era when stock market returns were more tepid than they are today. Livermore seemed to think that this was the first time in history that the average Joe investor in the US really did well out of stocks. The 1915 US stock-boom was a direct consequence of the War in Europe: the United States, neutral in the early years of the war, was the only country that was well placed to provide all the warring parties with the supplies needed to feed the war-machine. Fast forward to the present today, and it is difficult not to see parallels between the situation of Australia today, with the current trade-war situation, and that of the United States in 1915. There has been a high level of pessimism in the Australian financial media lately around the implications of the rising trade tensions, and the flow on effects of this on local shares. The consensus opinion seems to be that investors should reduce their exposure to stocks. But perhaps the local economists and other finance pundits have misread the situation?. As with the US at the start of WWI, Australia is currently sitting on the fence in this escalating trade war, and assuming the country is able to maintain this precarious balancing act, many listed Australian companies could potentially stand to enjoy substantial share price re-rates, as their rivals in the Chinese or US markets become uncompetitive and lose market share as a result of higher tariffs. Thus it is possible that the stockmarket pessimism is misplaced, and for investors 2019 could prove to be akin to 1915 in the United States, a year to remembered.
Nice comment Patrick.
Nice article Patrick - see you at partners drinks tonight.
Great article Patrick. I've got my foot a bit in both camps. Probably like a lot of other investors at the moment, just sitting on the sidelines waiting to determine the way the market is going to move. Possibly sideways? who knows? However, I have been slowly building up and transferring out of some equities and moving into unallocated Gold and Gold stocks. I guess you could say I'm more long-term bearish. Mainly due to the high debt of levels in countries like the USA and there ability to sustain it.
Thanks for the comments everyone. It sure is confusing with all the Patricks in this conversation!
I'm a buy and hold. I've built up an income stream through dividends over many years, and I intend to never sell. I don't think this is a bad strategy