Since 2000, We see a steep correction every two to three years of between 20 - 50%.
2000 - 2001 Sep, 50% correction (Bear Market).
Cause: Record high equity valuations in terms of CAPE ratio. EM equities rallied 100%, tech bubble. 9/11 terrorist attack.
2002 - 2003 Jun, around 30 - 40% correction of MSCI World (Bear Market). SARS, corporate malfeasance. False start to the bull market.
2007 Nov - 2009 Feb, around 60% correction of MSCI World (Bear Market). Great Recession. Sub Prime meltdown started from the US. Equity valuations in the US were not extremely above median.
2011 May - 2012 Sep, around 20% correction (Big correction). Eurozone crisis. Tsunami in Japan. Slow global recovery.
2014 Nov - 2016 Aug, around 10% correction (big correction). EM equities and commodities hit by rising US interest rates.
"History Seldom Repeats, It Merely Rhymes", so says Mark Twain.
We should see a major correction of at least 20% in 2018. Even with Central Banks ready to go back to rate cutting mode. We are extremely late in the recovery cycle. Here's why:
1. Almost a decade of low rates and quantitative easing have resulted in pockets of debt bubble in Asia. We are seeing oil & gas sector in Singapore slowly going into defaults. High corporate debt and defaults in China has so far been swept under the carpet by the government but for how long?
2. Valuations in terms of CAPE or cyclically adjusted price earnings ratio in the developed world is at the highest since 1929 just before the Great Depression and 2000, the height of the tech bubble.
3. IPOs are at an increasing rate worldwide, indicating that companies feel that valuations are near peak. Companies tend to IPO to exit into public markets.
4. Lots of money chasing after expensive assets. We see private equity funds, developers bidding for assets at very low earnings yields of 3 - 4%. As soon as interest rates rise another 1%, the projects immediately do not make sense.
Here are the reasons why the bull markets may last a while longer:
1. Inflation is still benign. Due to automation, wages are not rising as fast, so we don't see 3 - 4% wage growth in the US, unlike in 2005 - 07.
2. Still a lot of fear in the markets. Analysts, talking heads of CNBC and Bloomberg are touting the end of the bull run. There is far too much worries to signal the end of the bull. This must be the most hated bull run ever.
3. Emerging market equities, such as Russia, Turkey and Brazil are still well below median in valuations. They are projected to produce between 10 and 16% return per annum nominal, which is quite impressive, compared to the US' 2%.
In this part of the cycle, what do we do?
Global economy slowing down (2002, 2009 - 10), buy stocks. They are the first to recover. Buy land for future development. buy hard assets like completed buildings because yields are super high at 9 - 15%. No competition for your bids. Buy commodities. Buy high yield bonds.
Global economy hits trough (2003 - 04, 2011 - 12), sell some stocks but not all, buy hard assets as yields start to compress. Start to develop your land into buildings as land prices rise. Profit margins for developers who bought in 2009 is at the highest.
Global economy recovers (2005, 2013 - 15), stop buying hard assets because they are not liquid enough to exit quickly. Buy only properties with redevelopment potential. Start selling your projects. Keep your commodities. Interest rates have started to rise but hold on to your high yield bonds.
Global economy heats up (2006 - 07, 2016 - 18). Start to sell some hard assets that have very low yields, e.g. shops at 3 - 4% cap rates. Sell your projects quickly, if not rent them out. Sell some liquid assets like stocks. Invest only in ETFs, unit trusts. Anything that's liquid. Do not hold on to illiquid high yield bonds in Asia.
First signs of trouble emerges (2007 Nov). Sell of equities quickly. You should have sold half your hard assets and hopeful sold all your projects by now. Keep very liquid with bond and balanced funds. Alternatives like CTA come in very handy. You may start to short equity ETFs. Start selling commodities.
Global slowdown starts (2008 Jun). Cash, investment grade bonds, CTAs, short equity. Start looking for blood on the streets. Opportunities galore.
2000 - 2001 Sep, 50% correction (Bear Market).
Cause: Record high equity valuations in terms of CAPE ratio. EM equities rallied 100%, tech bubble. 9/11 terrorist attack.
2007 Nov - 2009 Feb, around 60% correction of MSCI World (Bear Market). Great Recession. Sub Prime meltdown started from the US. Equity valuations in the US were not extremely above median.
2011 May - 2012 Sep, around 20% correction (Big correction). Eurozone crisis. Tsunami in Japan. Slow global recovery.
2014 Nov - 2016 Aug, around 10% correction (big correction). EM equities and commodities hit by rising US interest rates.
"History Seldom Repeats, It Merely Rhymes", so says Mark Twain.
We should see a major correction of at least 20% in 2018. Even with Central Banks ready to go back to rate cutting mode. We are extremely late in the recovery cycle. Here's why:
1. Almost a decade of low rates and quantitative easing have resulted in pockets of debt bubble in Asia. We are seeing oil & gas sector in Singapore slowly going into defaults. High corporate debt and defaults in China has so far been swept under the carpet by the government but for how long?
2. Valuations in terms of CAPE or cyclically adjusted price earnings ratio in the developed world is at the highest since 1929 just before the Great Depression and 2000, the height of the tech bubble.
3. IPOs are at an increasing rate worldwide, indicating that companies feel that valuations are near peak. Companies tend to IPO to exit into public markets.
4. Lots of money chasing after expensive assets. We see private equity funds, developers bidding for assets at very low earnings yields of 3 - 4%. As soon as interest rates rise another 1%, the projects immediately do not make sense.
Here are the reasons why the bull markets may last a while longer:
1. Inflation is still benign. Due to automation, wages are not rising as fast, so we don't see 3 - 4% wage growth in the US, unlike in 2005 - 07.
2. Still a lot of fear in the markets. Analysts, talking heads of CNBC and Bloomberg are touting the end of the bull run. There is far too much worries to signal the end of the bull. This must be the most hated bull run ever.
3. Emerging market equities, such as Russia, Turkey and Brazil are still well below median in valuations. They are projected to produce between 10 and 16% return per annum nominal, which is quite impressive, compared to the US' 2%.
In this part of the cycle, what do we do?
Global economy slowing down (2002, 2009 - 10), buy stocks. They are the first to recover. Buy land for future development. buy hard assets like completed buildings because yields are super high at 9 - 15%. No competition for your bids. Buy commodities. Buy high yield bonds.
Global economy hits trough (2003 - 04, 2011 - 12), sell some stocks but not all, buy hard assets as yields start to compress. Start to develop your land into buildings as land prices rise. Profit margins for developers who bought in 2009 is at the highest.
Global economy recovers (2005, 2013 - 15), stop buying hard assets because they are not liquid enough to exit quickly. Buy only properties with redevelopment potential. Start selling your projects. Keep your commodities. Interest rates have started to rise but hold on to your high yield bonds.
Global economy heats up (2006 - 07, 2016 - 18). Start to sell some hard assets that have very low yields, e.g. shops at 3 - 4% cap rates. Sell your projects quickly, if not rent them out. Sell some liquid assets like stocks. Invest only in ETFs, unit trusts. Anything that's liquid. Do not hold on to illiquid high yield bonds in Asia.
First signs of trouble emerges (2007 Nov). Sell of equities quickly. You should have sold half your hard assets and hopeful sold all your projects by now. Keep very liquid with bond and balanced funds. Alternatives like CTA come in very handy. You may start to short equity ETFs. Start selling commodities.
Global slowdown starts (2008 Jun). Cash, investment grade bonds, CTAs, short equity. Start looking for blood on the streets. Opportunities galore.
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