Conversations around the impending end of the current bull cycle are occurring with increased regularity among certain industry insiders. But are the concerns well-founded or can some of the jitters simply be attributed to the sheer length of the current cycle?
“We share the sentiment that it has a been a fairly long bull market, and with valuations staying high it is easy to make a case to sell, but we believe it is still not the time to be defensive,” says Jeremy Peng, Director & Portfolio Manager at NEI Investments
There are three main indicators that support Peng’s belief that the current cycle still has some legs. The first, and probably most significant, is the growth currently being seen in the global economy. “It’s a synchronized growth across multiple countries and most of the indicators point to that continuing,” Peng says.
“In this context, we believe that equities can still deliver sizable returns even when valuations are high because of the healthy earnings growth. This year in the U.S., the S&P 500 is up 14% in local currency and that came mostly from earnings growth.”
Peng also believes that the attitude of central banks supports his view. Although central banks are normalizing interest rates, the increase is expected to be enforced gradually, due to the fact that inflation has remained pretty low in most developed countries.
“Interest rates won’t be as low as before but they could still remain low, by historical standards, for a few more years,” Peng says. “We think interest rates will still be fairly accommodative for equities.”
There are always risks in any market environment, but Peng views current markets risks as being “routine” in nature.
“There are some risks, such as the North Korea situation, that does carry significant implications, but we believe those are low probability scenarios,” Peng says. “Investors who want to earn good returns should be considered, but they should not shy away just because there are some tail risks that have a small probability of happening.”
“Even though the bull market has been long, we still believe it is the right call to be overweight equities and underweight fixed income at the moment.”
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