The end of the bull run?

Image courtesy stock.xchnge (KillR-B)

Image courtesy stock.xchnge (KillR-B)

The recent equity market sell-off sparked fears the bull run had finally come to an end and a market collapse might be around the corner.

Speaking at an Old Mutual Investment Managers’ Conference, Hywel George, director of investments, said in trying to decipher the factors affecting the market it helped to consider a longer-term perspective.

George said, generally speaking, equity markets went up and a healthy dose of equity exposure was a good thing. But equity markets moved in phases. Over the last 144 years, the US equity market (the S&P 500) experienced several bull markets as well as “flat” periods of between 15 and 20 years, usually characterised by some crisis.

George said the latest one was the Lehman crisis of 2007 and 2008. The next bull market would be led by consumerism in emerging markets, including Africa, he said.

Ten years ago the middle class in Africa was 116 million people. Today, a third of the population – 326 million people – on the continent were middle class. George said this compared with 54% in Asia and 77% in Latin America.

According to the World Bank definition, anyone earning between $4 (R43.50) and $20 a day is middle class. These consumers would get credit cards, take up mortgages and spend, he predicted.

George said corporate profits recovered before an economic upturn could be felt.

US corporate profits as a percentage of gross domestic product fell to nearly 4% amid the crisis in 2009. Now it was close to 12%. But how was this possible, given the economic pressures?

George said it happened because there was very little cost and wage pressure on these corporates and they were able to expand their margins.

US consumers had also started spending again. US house prices and car sales had now almost reached their earlier peaks.

George said that, to a great extent, the US consumer had repaired that country’s balance sheet. Margins had recovered and revenue was starting to grow.

Earnings growth along with the rerating of markets pushed markets higher, but it also led to more volatility, he added.

George said this period was a nervous one for equity investors, but he still believed equity markets would march higher because of the phase of the cycle they were in.

Investors should stay with the markets, hold their nerve and buy when they saw dips, he advised.




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