Macro
A combination of better-than-expected US growth, a ramping up in quantitative tightening in the US, and a massive liquidity injection in China have seen Wilson Asset Management Chairman and Chief Investment Officer, Geoff Wilson, alter his market outlook from being “ultra” to only “mildly” bearish.
In the latter part of 2018, Wilson had forecast a market fall of around 30 to 40% towards the end of 2019. However, this view has now been tempered given several recent developments, with the manager now expecting a fall of only around 5%.
“I thought the market would probably fall 30-40% and bottom towards the end of this year. That was my big picture view. And that was based on three factors,” Wilson told Livewire Markets in an exclusive interview.
Firstly, Wilson explained that all the leading US economic indicators were pointing towards declining growth. Secondly, he pointed towards quantitative tightening in the US ramping up as quantitative easing in the UK was coming to a halt.
Thirdly, he pointed out that China pumped around 1 trillion yuan into the system in January, followed by further massive liquidity injections in both February and March.
“Of my three negative factors, two of them are gone and one of them has reversed. China is actually pumping money into the system,” he said. “In January, I turned from that negative 30% to probably 5% and that was before I was aware that China was pumping money into the system.”
Brutal tsunamis become mild headwinds
Wilson believes that the main risk facing the market now is earnings, given that the potential for “brutal” consequences resulting from the removal of liquidity from the system due to QT has now dissipated: “Now that's off the table, I'm just really mildly bearish.”
Of all the factors influencing markets at the time he made his initial forecast, Wilson said that QT was the one factor that he was most scared of, given the widespread expectations that QT was “going to go on for two and half to 3 years”.
And his fears were not unfounded, given certain parallels: “… the reason why I was so incredibly concerned is we've seen in Australia what could happen with liquidity being taken out of a system and we're witnessing that with property prices.”
“So, you've got liquidity coming out of the system, drops you 20%, and then you have interest rates go up so P/Es contract, and also you've got slowing earnings. So, you have this tsunami … on all fronts, which has now it's changed to just a little bit of a headwind.”
"The reason why I was so incredibly concerned is we've seen in Australia what could happen with liquidity being taken out of a system and we're witnessing that with property prices.”
Inflation genie to remain in bottle?
While it appears to be presently under control, Wilson thinks one of the more important questions facing markets at the moment is whether inflation will rear its head in the US.
He ponders whether another bout of quantitative easing or “QE4” be the next move, and if there is, will there be inflation as the Fed plays with liquidity and will there be a longer term, lower growth environment that isn't as cyclical over time, and will there slowly be P/E contraction akin to what Japan has witnessed over the past 30 years.
At any rate, Wilson believes it’s far too early to make any kind of assessment on any of these fronts.
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