• Will we see any special dividends from the banks as bad debt loan provisions are unwound? Watch here.

Two reasons this bull market is set to continue

07022020_Bull market

Two reasons this bull market is set to continue

Since early 2009, soaring global markets have made shares an extremely rewarding place to invest. With profits likely to keep recovering, and interest rates and inflation likely to stay low, I see no reason why this bull market will not continue.

Since the beginning of 2013 the real S&P500, which is adjusted for inflation, has risen by almost 200 per cent and, apart from two bouts of volatility in 2015/2016 and at the end of 2018, it’s been smooth north easterly sailing especially since 2016.

If you recall, global stocks began a march higher in February 2016. At the time the global economy looked bleak but major economic ‘blocs’ were about to accelerate (relatively speaking of course) thanks to a dovish Federal Reserve and a massive Chinese domestic economic reflation attempt.

That we have been in a bull market for the last six years cannot be contested, and that’s a difficult thing for a value investor to want (or need) to admit. What’s challenging is not that we want lower prices to be able to buy more safely, what is challenging is holding on to what we have even when prices start to exceed the valuation estimates based on our most optimistic assumptions.

When we take a balanced look at global markets, we see conditions similar to those that existed in 2016. A manufacturing slowdown, as measured by the world industrial production excluding the US – is underway.  And the US indicator for new manufacturing orders, published by the Federal Bank of Dallas, has fallen 30 per cent from its 2018 highs.

But despite these simple measures, the market is focused ahead. With the US Federal Reserve easing and China again reflating, investors are looking past the gloom and are factoring in an improvement in conditions.  At some point in the future, the market might even become fearful of inflation emerging but right now it’s a trade truce between China and the US and a calming of Brexit uncertainties that has captured investors imagination.

Interest rates will be lower for longer

On top of all of that, we have a Federal Reserve confronting a suite of structural factors that should keep rates low.  Low rates don’t render asset prices immune to sell-offs but they are of course supportive for all asset including equities.

The structural factors that suggest rates could remain low for a very long time and therefore support already stretched asset prices, include demographics and debt among others.

Over the next eight decades to 2100, Earth is forecast to see its population growth slow almost to a halt. More importantly perhaps, the proportion of the global population over the age of 65 will rise from 10 per cent today, to over 20 per cent by 2100. A doubling of the proportion of people over 65 will have a significant influence on global growth as well as on government budgets.

We have seen in Japan when more people retire, productive capacity and economic output decline. Coincidentally, government healthcare and pension liabilities rise.

Individually, and in combination, lower economic output and greater debt have a depressing effect on interest rates.

If an ageing population and increasing debt are a negative influence on interest rates, then the world may be in for an extended period of low rates. And the US Federal Reserve is in no rush to turn hawkish or tighten policy. Despite a continuing decline in unemployment, real wage gains remain muted.

Over in China, the economy is collecting itself off the mat after its trade war with a Trump-led USA. Understandably, Chinese shares were hit hard and are arguably ‘under-owned’. They now trade at about 11 times current earnings. If Chinese stocks are included, emerging market equities are likewise trading at just 12 times current earnings. The question is whether these earnings are bottom-of-the-cycle. If they are, and earnings rebound, Chinese shares could be a bargain. We note reports that Chinese credit creation has accelerated, and manufacturing is also recovering. If correct, industrial profits could be at the low point of this cycle.

Earnings could keep recovering

If global growth continues, the equity risk premium (ERP) should also decline. A decline in ERP while the risk-free rate remains subdued, will raise equity valuations even if earnings don’t recover. But earnings may indeed recover as well. Under these conditions, stock market performances could exceed those of the year just completed.

It could be argued that, much as we can now see was the case in 2016, global markets could be in a bit of a purple patch – a sweet spot, if you like – where aggregate profit growth is only beginning to recover, while inflation remains low and central banks remain accommodative with no warnings about a change of tack.

If there is no change expected in this stance, and the current combination of factors remains unchanged, then with the exception of a black swan event – that by definition is unpredictable – there is no reason to expect anything but a continuation of the bull market and, with that, higher prices and expanding PE ratios in 2020.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Hi Roger, Long time follower, first time poster.

    How much do you think the ‘noise’ of the recent Coronavirus has eroded prices beyond fair value for stocks like Flight Centre and Webjet, and more domestically REX? I am beginning to lean towards attractive valuations off the back of these recent downward swings, and with a longer term view find 2 of these businesses well positioned to recover of the medium term, what do you think?


    • Yes Sebastian, I think you are right. I think there will definitely be long term opportunities. These are quite common when the market treats that which is temporary as permanent.

      Keep in mind with FLT, that they are in the throws of a strategic rethink with respect to the Australian leisure business, aiming to to “right-size” the Flight Centre Brand network in terms of both shops and people: Market is expecting up to 30 Flight Centre shops closed and an additional 30 converted to either Travel Associates or the new youth-focused Universal Traveller brand, an additional 30-40 leisure shops shifted to better locations, 20 Flight Centre shop openings, including high profile hyperstores in the Melbourne CBD and about 200 sales consultants added to the Flight Centre brand network following a reduction that arguably left stores understaffed. So expect some additional costs as well as one offs related to the changes.

    • My view is that this could well be a real pandemic (that has a substantial impact). If so, the tourism industry will be badly effected for a least until vaccines are introduced and people’s anxiety drops. However, there might be longer term behavior changes – I for one would not be too keen on going on cruise from now on.

      Sure stocks might seem relatively attractive now (even so FLT has not dropped that much) the risks however are substantial.

      • Thanks John, Flight Centre is down almost 50% from its August 18 highs but I agree there may be better value. With the takeover of our holding in Healius we are now holding plenty of cash to take advantage of Covid19 weakness.

  2. Hi Roger / team,
    As someone who only started looking into investing soon after the GFC it feels like governments and central banks will no longer allow (as far as they are able) a significant market pull back / recession to occur. I also wonder whether there is an irony to this if their action in ‘kicking the van down the road’, is actually just setting up an even larger event at some future point.
    What are your thoughts on this.

    • Hi Peter, Don’t get me wrong, while low rates are supportive for asset prices and valuations, they don’t render assets immune to violent pull backs from time to time. We still have cash for good reason.

  3. anthony scelzi

    I agree with John. Rumour has it that Xi Jinping has taken to the safety of an underground bunker and the corona virus numbers are more like 45,000 dead…800,000 infected

  4. You are probably right Roger but I think in relation to the Coronavirus, though it is unlikely to be so, it might be that black swan that you say can’t be foreseen. Need some better information on what this is and about its potential effects on commerce, trade, behaviour but that will take probably about two weeks for better information. If stock plunge during this period then it might be worth taking the risk of purchasing but might be better to play possum for now and see how things start playing out.

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