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Analyst Calls Announcement An Equities Market Has Started As Premature

Equities

Global equity markets have shed 10% over the past few weeks and the big tech luminaries that comprise the FAANGs (Facebook, Apple, Amazon, Netflix and Google [Alphabet]) far more than that. It’s the second time this year after a similar correction in February and barring a strong last minute Santa Rally surge, something that currently looks doubtful, stocks appear unlikely to close out 2018 higher than where they started the year. If equity markets manage to get close to break-even that would, at this stage, be warmly welcomed by most of those investing online.

Over the past couple of weeks, the economic, business and investment news has been awash with high profile investors and sector journalists calling time on the mighty equities bull run that has been in place since the beginning of the post-international financial crisis recovery took hold a decade ago. However, one prominent analyst, Citi Bank’s Robert Buckland, argues that those investing online should not, at least not yet, accept as gospel that the current dip announces the advent of a new bear cycle.

Writing for the Financial Times, Buckland explains how he counts the number of possible ‘red flags’ heralding a bear market as a total of 18. At least for now, he says that he sees only 4. These are:

  • High valuations (with particular emphasis on U.S. equities).
  • Company balance sheets stretched by debt-fuelled M&A.
  • Profit margins at cyclical highs.
  • A flat U.S. Treasuries yield curve.

These symptoms all point to the economic cycle turning towards the kind of global recession that inevitably takes hold periodically, particularly following long, uninterrupted periods of growth. And recessions that grip broad swathes of the world at once mean a bear market for stocks. However, Buckland points to other factors, that still outnumber these ‘red flags’ which are far more positive indicators and may yet mean a bounce back from the current dip.

Buckland points to the fact that risky large-scale corporate investments like M&A activity is muted. A real ‘melt up’, the period at the end of an ageing bull market where stock markets typically surge like a Super Nova star on the very of collapse, also suck in company boards and chief executives. They become giddy on the fumes of invincibility and make aggressive moves. The currently conservative approach doesn’t point to that. There are also not a lot of IPOs, which tend to flood markets when they are overvaluing companies, capitalising on the extravagance. Additionally, large volumes of new capital haven’t flowed into equities this year.

Buckland does, however, warn that there may be new ‘red flags’ that are not on current checklists and monitored by investment banks such as Citi. While the balance sheets of major U.S. and other developed market banks are closely watched, Chinese banks now play a much bigger role in the global economy than at any other time. They do, says Buckland, currently look more worrying. The problem investors have with any Chinese company is that corporate governance is opaque and major fundamental problems only become apparent after the fact. Could China be the spark that lights a new fire that will devastate global financial markets? It’s possible.

The huge flows of cash that international quantitative easing programs lubricated markets with are another factor. With QE programs being rolled back now, there is a fear that they encouraged the buying of previous dips which might not be the case this time, leading the dip into a true bear market.

However, Buckland maintains that while there are certainly risks, compiling lists of ‘scary things’ that could potentially pose a threat doesn’t mean that all of the usual ‘red flags’ on his checklist that are not yet flying should be discounted. He feels that more evidence needs to pile up before calling the current dip the first stage of a new bear cycle. All-in-all, he believes that this dip won’t be the last and there will be increasing volatility and further dips before the bull market finally gives up the ghost. His advice is, contrary to much of what else has been said recently, to buy this dip. He thinks there will still be a bounce back, at least this time.

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Paul

The author Paul