The week that was with Michael Pascoe
The end of an interesting week for markets with the odd wobble at home and abroad.
The bears are out again at Morgan Stanley, predicting a 25 per cent fall in developed world stockmarkets this year. They’re just not sure whether the fall has already started or if there’s one more leg up before the dive.
The analysis is aimed more at US and European markets than Australia, given our hybrid developed world/China nature, but the investment bank’s strategy team reckons Asia is riding for a fall as well. And Australian market sentiment still takes its lead from Wall Street more often than not.
In his latest research note to clients, Morgan Stanley’s Gerard Minack’s own hunch is that the present wobbles will pass, allowing markets to regain their poise before the substantial mid-year fall – a bear market.
Market predictions. Photo: Spooner
The forecast is based on two key beliefs: that markets have run well beyond fundamental justification and will become disappointed with tepid developed world economic growth; and, more or less, that “this is what always happens” after a big relief rally.
“We don't think that developed equities have started an extended bull market,” writes Minack, a rational bear leading up to the GFC.
“We see the rise from March 2009 as a typical relief rally that follows major bear markets. Those relief rallies can occur regardless of underlying macro conditions, regardless of liquidity conditions and - most importantly - regardless of what happens next.
“The fundamentals did improve this time - systemic financial crisis ended - but we think risk assets have swung to pricing a better outlook than is likely.”
He argues that the average initial relief rally is around 70 per cent – the sort of rally most developed equity markets have seen with the MSCI World market index showing 77 per cent growth from its March low. (Perhaps beneficially, the Australian market is lagging on that count, pegging closer to 60 per cent.)
“After the relief rally there is, on average, a 25 per cent pull-back - so, technically, a new bear market. That's what we expect at some stage this year.”
But Minack does offer some good news. Well, relatively good news:
“Our view is that a return to the lows is not likely - not out of the question, but a tail risk only - but nor will a new bull market start. We expect an extended period of range-bound markets.”
The Morgan Stanley argument runs that official support for risk assets is starting to be withdrawn and a monetary policy tightening cycle is getting underway in the healthier economies.
Minack says higher US interest rates aren’t nearby and that the recent market falls could be more about growth concerns than interest rates - and those growth worries might be due to the weather. He cites a correlation between cold US weather and economic data surprising on the downside.
Beyond the snow, the base case remains that US market has tracked the rise and rise of leading economic indicators that have gone beyond what the economy is capable of delivering.
“If, as we expect, those leading indicators start to wobble, we’ll have a compelling case to sell,” says Minack.
“We don't want to over-emphasise this. On a six-month view we think developed world equities will be lower. However, in a market where we expect less trend and more volatility, we're aiming to finesse our shift to a bearish view on the market.”
There are plenty of the usual ifs and buts in there, but Minack has more credibility than most in this game given his prescience before the fall. His ursine nature is carefully rational, as opposed to the Chicken Little types that tend to grab headlines. (Anyone remember the stuff about Australian house prices crashing 40 per cent and 20 per cent unemployment around now?)
But while it’s easy to see difficulties with America’s fundamentally flawed economy, the case for an Australian bear market is less clear. Personally, I have plenty of reservations about any “this is what always happens” reading of charts. Historical charts show what can happen, not necessarily what will happen. As a wiser man has said, history echoes, it doesn’t repeat.
Maybe it shows you just can’t keep a good bear down.
Michael Pascoe is a BusinessDay contributing editor
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