We may yet be proved wrong but it is starting to look as if our call that we were not heading into a more pronounced period of equity market weakness was a decent one. In a yourmoney.com article on 2 October, I was quoted as saying that most bear markets begin when economies are strong or overheating. As evidence, I pointed to the IMF world output gap having been 2% in both 2000 and 2007 when the last two bear markets began, whereas the gap currently is -2%.
"It is very hard being an investor at the moment"
I also noted, though it wasn’t used in the article, that bear markets also normally begin when markets are overvalued, again pointing to high valuations in 2000 and 2007, and current valuations that are certainly not stretched (in fact dividend yields pretty much everywhere are above their longer term averages). I stand by these assertions.
There is no doubt that it is very hard being an investor at the moment, let alone being an asset allocator. Negative real interest rates, bloated central bank balance sheets, a slowdown in China, weak investment across the developed world all serve to cause consternation that another 2008 is just around the corner.
My view is that ultra-loose monetary policy and scope to boost fiscal policy if required will prevent growth from slipping into recession. Furthermore, the prevailing weakness will keep a lid on inflation. This is a ‘Goldilocks’ environment that equities tend to thrive on.
Published in Investment Letter, November 2015
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.