The flood of money pouring into pot stocks and cryptocurrency is “rocket fuel” to a bull market fast approaching the euphoric stage, according to a Bay Street CEO.
John Wilson, managing partner of Ninepoint Partners, compared the current market cycle position to that of Q3 in 2007 when it also seemed “easy to make money” and hard to make investors aware of risk and the importance of being selective.
He said: “I’m saying we are not yet at the euphoric stage. I do think we are approaching there and have passed through the thrill stage, with people getting excited by new, novel concept opportunities like pot stocks, bitcoin and cryptocurrency.
“These are the type of things that happen late in the cycle and we are at that point when people are very engaged with risk-taking but very badly engaged with the fact that things could go wrong for them.”
In his 2018 outlook, Wilson said he believes the US Federal Reserve could announce three, possibly four, interest rate hikes this year and, crucially, another three or four in 2019.
Typically for this stage, he said, there is synchronized growth in the four main economic regions: the US, Europe, China and Japan. However, he raised concerns that the bond market has been continuing to underestimate Fed rate hikes, while he sees the Central European Bank beginning to taper its QE programme this year as it heads towards a tightening programme in 2019.
He said: “Eventually, we think, and this is what generally happens, higher rates will invert the yield curve and cause a recession. If you look at it from a timing perspective, it looks more likely to be a 2020 event, although a trade war could accelerate that downturn.”
While Wilson believes sentiment is becoming “aggressive and greedy” and there are big concerns over the NAFTA negotiations, Ninepoint Partners is bullish for 2018.
He said: “That’s not just because we had a great start in the month of January and even with the pullback, it doesn’t change our view.
“We don’t think earnings revisions have been strong enough. In other words, earnings estimates still have to catch up with the impact of US tax reform and we do think that can be a tailwind to equity valuations.”
He added: “We are still in a money-printing world with very low interest rates and that’s obviously supportive of asset prices, while a weaker US dollar boosts multinational and commodity prices.”
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