Is the bull about to enter the china shop?

01 September 2018

The US economy recently celebrated a significant milestone – the longest bull market in history. The S&P 500 is double the value it was during the highs prior to the credit crunch and has risen nearly 250% since the lows that followed. History suggests that the end of this current cycle is nigh but predicting when that will be is incredibly difficult.

One of the reasons the US has experienced a lengthy bull run is that companies have been reluctant to invest, instead opting to return cash to shareholders through dividends and buybacks. This has kept growth low, and inflation and interest rates muted. Investors have been forced to rely on equities for returns in a stubbornly low-return environment.

What will be the catalyst for change?

Interest rates are now on the rise, which could expose the vulnerabilities hiding within the global economy. The higher they go, the more likely they are to restrict growth. As interest rate hikes start to bite, companies that have taken advantage of cheap lending for speculative projects and investing their capital recklessly, tend to prove susceptible first.

These vulnerabilities can extend to countries; the economic crisis in Turkey is a good example, which we discuss in more detail on page 2. Such mini crises in peripheral areas of financial markets can be early warning signs that tighter monetary policy is having an impact.

A further potential catalyst for a market correction is the ongoing prospect of a trade war. Global air freight and container shipping data suggest that global trade growth peaked in 2017, and that a slowdown is already well-established. Faced with poor visibility of the future for trade, investor confidence is undermined as rising business uncertainty takes hold.

The Sanlam view

Discipline is the key to successful long-term investing. Often, the best returns can be found at the end of a bull market, so leaving early can be detrimental to returns. What’s important is looking beyond the current economic cycle and investing in businesses that can weather the storm when the times comes.

“While many people expect the bull market to end soon, there may be surprises as to how it evolves. Interest rates will have to get to a point where they restrict growth and rein in inflation, but most developed economies still have exceptionally loose monetary policy. Before this bull market ends, inflation could surprise investors and create difficult market conditions to navigate.” – Philip Smeaton, Chief Investment Officer

Investment view: The trouble with Turkey

The current economic crisis in Turkey is a stark reminder of what happens when businesses and governments take advantage of cheap lending, disregarding how that debt will be paid off and whether the growth it is fuelling is sustainable.

A growing debt burden

In the last twenty years, Turkey has taken on over $460 billion1 of debt – more than half of its GDP. Much of this has gone to the construction industry, with building accounting for almost 10% of the country’s economic output2. But with hundreds of residential buildings and offices now lying empty, and construction companies struggling to pay their debt, this is just one example of Turkey’s chickens coming home to roost.

An economy in crisis

Turkey’s government allowed the economy to overheat, failing to increase interest rates to control inflation, which is now out of control. In addition, the value of the Turkish lira has plummeted, and foreign investors are turning their backs. Bankruptcy is commonplace, and Turkey is now in a needless tariff war with the US over the release of a US pastor.

Long-term economic sustainability is key

For a while, Turkey was providing investors with good returns, but the longer-term risks were clear. We chose to have a low exposure to Turkey, preferring emerging market countries that invest in the longer-term sustainability of their economic policy, such as educating their people and managing their economy prudently. We take this approach at a company level too, which is why we think we’re well-positioned for any future uncertainty. (fifth paragraph)

This article is for information purposes and should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by Sanlam Private Wealth. Any expressions of opinion are subject to change without notice. Reproduction of this commentary is not allowed in whole or in part without prior written agreement from ‘Sanlam Private Wealth. Past performance is not a reliable indicator of future results. Investing involves risk. The value of investments, and the income from them, may fall as well as rise.

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