As investors continue to fret about the length of the equity bull market, Charles Stanley’s John Redwood says it will run until governments and central banks decide to end it.
The current bull market in effect since the aftermath of the global financial crisis of 2007-2008 has continued to puzzle investors.
Since 2008, the MSCI World index has risen by 189.7 per cent, in sterling terms, despite several setbacks and a more challenging geopolitical backdrop.
Investors have become increasingly concerned that valuations look stretched, particularly as central banks start to move away from the quantitative easing and loose monetary policy regime in place since the global financial crisis.
Noting Redwood said: “Like all good worriers, we have asked ourselves, could this correction turn into a share bear market? Is this the end of the current long cycle?
“We do not think so. There is no agreed length to a cycle. There are long cycles and short cycles. This is a long one, but that does not mean it has to end soon.”
Performance of index since 2008
Source: FE Analytics
The strategist argued that cycles end when central banks and governments decide to end them, “usually to curb excessive inflation”.
He said governments and central banks can end market cycles by choosing to increase borrowing costs – through interest rate increases – and by restricting credit.
However, Redwood added that cycles can end if authorities lose control of banks and the credit system, as was seen in 2007-2008.
A bull market also requires confidence to sustain it, he said, which is something that investors have been lacking more recently.
“If companies lose confidence they stop investing, and they stop hiring new people,” explained Redwood.
“This can then transmit the loss of confidence to the people who cannot get jobs or who lose their jobs in the sectors that do the work to build the properties and put in new plant and equipment.
“A crack in business confidence can lead to a loss of consumer confidence. If consumer spending then falls or its growth slows, that in turn hits company cashflow.”
Redwood pointed out there were a number of ways confidence in the market could slip away, particularly if global growth were to slow.
He said Federal Reserve could raise interest rates too quickly, slowing the US economy –one of the drivers of global growth – although this was unlikely as inflation remains at low levels.
Another fear is that Chinese authorities may tighten credit expansion too much in reaction to the increasingly indebted banking sector, slowing growth. However, Redwood said much of the debt is owned by the Chinese government and has a number of possible options to take resolve the issue.
Other investors are concerned about a downturn in commodity markets following more recent rallies in the oil and metals markets. However, global growth remains on track to ensure demand for commodities is likely to remain high, he said.
“This bull market has been fraught with worry and disbelief by many professional investors for much of its life,”said Redwood. “The banking crash left a longer term shadow over investment confidence.”
Redwood said under normal conditions a bull market is most likely to end when investors are very optimistic and fully invested.
This is usually accompanied by increased borrowing by investors to buy assets, said the Charles Stanley strategist, but he said this has not happened.
“It takes a bit of time for the turn of the cycle and the bad news that brings to have an impact, gradually pushing a correction in markets into something more serious,” he said.
“It does not feel like that at the moment.”