6 big questions and one clear message for investors - stay long
Will AI save us from a bear market? Where are we in the cycle? Are there lessons in history? Answers to those questions and a few more...
Centennial Asset Management's Matthew Kidman answers six important questions for investors regarding the outlook for equity markets and what history can teach us about the current cycle.
Markets are at all-time highs. Digital currencies and precious metals are running hard. Central banks have started to cut rates. As always, there is a lot of conflicting information for investors to think about in this market.
We thought it would be useful to discuss several important questions and to provide some commentary regarding how to position for this equity market.
#1 - Can AI save us from a bear market?
AI will contribute to the market machinations over the next little while, but it won't stop a bear market unfolding. AI is the theme that allows everybody to say, "It's different this time". That said, I think it's only just started, by the way. It's not hard to see two years, maybe three years of AI frenzy. If you go back to 1997/98 and the emergence of the internet, everyone at the time said technology was changing everything we do. And it did.
It changed virtually every aspect of our commercial lives and our private lives. But we went through a boom, a bust, a clean out, and eventually the winners emerged years and years later.
I don't think that would be too far from where this AI-lead market could land.
#2 - Does this market remind you of any time in history?
Markets rhyme, but they're not exactly the same. There are a lot of differences about today versus any time that I can remember. One of them is the size of government debts. Another one, which I haven't experienced because there hasn't been a cold war since I've been in markets, but defence spending is accelerating at a rapid rate. And now, where it is similar, is the enormous investment in technology.
So, it reminds me of the late 1990s. Back then, things were being floated on big valuations. So this market is different, but there is definitely a similar boom going on.
The market tends to, over time, get more and more excited about some theme. Things don't go up in a straight line, but it does feel like the late 90s.
#3 - Where are we in the bull market - the beginning or the end?
I think we're right at the end. However, I believe it has a while to run yet.
The next year or two should be rewarding for investors. We are probably at the back end of an enormous run over the last couple of years. Now is normally a good time to make money.
#4 - What can we expect from central banks - the RBA and Fed - from here?
In brief, the market is saying you could get between two and four further cuts in the US, which will be good for valuations.
In Australia, I think we're a fair way through the rate-cutting cycle.
I thought originally we would get more rate cuts. However, employment is not too bad. It's not booming, but I think maybe one or two further cuts over the next year.
#5 - Are markets expensive today?
They are at the expensive end. Traditionally, the Australian market trades in the 14x to 15x PER range. However, value does depend on where interest rates are sitting. Today, interest rates are historically low, particularly for people who have lived over the last 40 to 50 years.
#6 - Why is it important to stay long towards the end of a bull market?
History tells us that investors tend to receive significant returns towards the end of a bull market.
Staying long now is important. In the US, when we had the tech boom in the 90s, you saw the NASDAQ double in a period of six months before it fell over. Again, the market rally accelerated in the four years leading up to the GFC.
That's one of the things I would say, as markets get more volatile, they are preparing for a change in direction. To date, volatility has been very low. So, we are not there yet. Stay long.