Doom sells. Whether markets are rosy or wobbly, making predictions of impending disaster is something of a competitive sport.
Perma-bears are famous for predicting 20 of the past three recessions while pundits devote significant time and energy to warnings about stuff that can go wrong. Those of a more cheerful disposition get less of a look-in.
Right now, the list of reasons not to be cheerful is particularly nasty: inflation is defying sober expectations and central banks know they cannot seek to puncture it without potentially torpedoing the financial stability they have worked so hard to foster since COVID-19 hit.
The price of, well, everything – equities, risky corporate bonds, cryptocurrencies, used cars, you name it – is sky-high. Supply chains are in a mess. The debt strains at Evergrande Group highlight the challenges to China’s property market, which accounts for a cool 28 per cent of the economy. Oh, and how about a poorly anticipated global energy crisis, just for good measure.
Any or all of these things could spoil the fun in risky markets that are priced for perfection and highly sensitive to a switch in tack from monetary policy. But several of them have been true for some time and have failed to leave a mark on a Teflon-coated rally in global stocks. The quarter that just ended was a little more challenging – the S&P 500 benchmark index of U.S. stocks ended flat. But those lucky or clever enough to get in at the rock bottom in March of 2020 would have gained around 100 per cent.
MFS Investment Management points out that this year has delivered more than 50 new equity market highs – not bad with three months still to go. We have also seen the longest positive run in shares without a pullback of more than 5 per cent since the early 1980s.
Some investors just don’t get what everyone is so worried about. Alex Ely, chief investment officer for U.S. growth equity at Macquarie Asset Management, is one of them.
“We’re not cautiously optimistic,” he says. “We’re fully bullish on the equities markets.”
Might inflation throw a curveball? What about a premature tightening of policy from the U.S. Federal Reserve Board? How about U.S. markets’ strong reliance on a small clique of big tech stocks? “You are not going to get much to worry me,” he says.
At the heart of Mr. Ely’s apparently indomitable optimism running through the US$6-billion he oversees in three funds lies his strategy of hunting for disruption, the “digitalization of everything.” That outweighs any debate about inflation and the next steps from the Fed, in his view. “Macro doesn’t matter,” he says.
Consumer technology, retail, media and other industries have already reshaped our daily lives and markets. Sectors still ripe for a revamp include banking, which is shifting from a reliance on bricks-and-mortar branches to smartphones.
The pandemic has accelerated that process, and the likely continued rebound in the economy next year will provide a further boost, he says.
“At best, we are about halfway through the bull market running in the equity markets. We think the S&P 500 will triple in the 2020s,” Mr. Ely adds.
That sounds outlandish. In fact, it represents a gain of slightly more than 11.5 per cent a year. Yet, the S&P 500 has churned that out, and more, almost every year since 2009.
This sort of positive attitude is rare, but not unique. Fizzing with enthusiasm in early September, Stuart Kirk, global head of research at HSBC Asset Management, remarked in a note to clients that three-month returns for the U.S. stocks benchmark had gone for 320 days without turning negative.
“Apart from a couple of times mid last century, that is a record since the Great Depression,” he wrote, advising readers to remember this extraordinary resilience “whenever markets panic.
“It shows the enduring triumph of human ingenuity, productivity and resilience – measured in the value of U.S. companies. Not two world wars, oil crises, disruptive technological change, countless financial meltdowns, terrorism, or a global pandemic have altered a steady upward trajectory,” he wrote. “Buy equities on a dip if you can, or buy them high. It doesn’t matter in the end.”
Can it really be that easy?
The more highfalutin version of this view is that betting against stocks makes little sense in an environment in which benchmark interest rates and, by extension, bond yields, are so painfully low.
“Equities remain the best escape from severe financial repression,” said Keith Ney, a portfolio manager and member of the strategic investment committee at European asset manager Carmignac, in a presentation last week.
In Europe, where some benchmark rates are still stuck below zero even while inflation forges higher, “the tax on savers has hit a new extreme,” he said.
Macquarie’s Mr. Ely seems content to focus on the more positive arguments.
“There’s like four of us at the bull party,” he says. “There’s nobody here. That makes me even more confident we’re correct. When it gets too full, we’ll sell, but I don’t think that will be until the 2030s.”
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