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Macroscope | Is a bear market around the corner? Not yet, but some caution and strategic thinking would help

Varun Ghotgalkar says emerging risks around the world have understandably spooked some investors, though markets do not seem to be heading for a sustained downturn yet

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A child wears a bear costume as part of a new year ritual in Comanesti, northern Romania, on December 30, 2017. Slowing macroeconomic indicators, rising interest rates and political uncertainty have prompted warnings that a bear market may be about to bite investors. Photo: AP
A mix of slowing macro momentum, rising interest rates and growing political uncertainty have raised the possibility that we are heading for a bear market. Although late-cycle warnings are visible, it may still be too early for such a call, given encouraging earnings figures and other positive economic signs.
Regional equity performance was mixed in May with the UK and US outperforming the global benchmark, while Swiss equities, emerging markets and Japan lagged. The euro area, hit by the recent increase in political uncertainty from Italy’s and Spain’s leadership changes, underperformed by 1.1 per cent, which means it has given back gains that the region made earlier this year. Global equity markets are now up 2.6 per cent in the year-to-date with the US back in the top spot.
If we look at the growth by sectors, technology, up 5.7 per cent, appears to be the best performing industry, followed by energy and materials in May. At the other end of the spectrum, telecoms, financials and utilities posted losses in descending order.

The current US bull market has been one of the longest in recent financial history, lasting over 80 months and delivering an annualised real price return of just over 12 per cent in US dollar terms. To put this in perspective, if we look at the history, the 12 S&P500 rallies that have taken place since the 1950s have had a median annualised real price return of 15.4 per cent and have typically lasted around four years.

In 2018, the economic and political backdrop has been more unstable with the Citigroup Economic Surprise Index losing around 50 points, 10-year US Treasury yields moving up by around 50 basis points and the Baker, Bloom & Davis Global Economic Policy Uncertainty Index jumping almost 40 per cent since the end of February. This instability, slowing macro momentum and a faster-than-expected rise in interest rates have resulted in choppy global equity markets since February, leaving investors worried about the prospects of a looming bear market.

Traders work on the floor of the New York Stock Exchange on May 30. Global equity markets are up 2.6 per cent in the year-to-date with the US outperforming the global benchmark. Photo: AFP
Traders work on the floor of the New York Stock Exchange on May 30. Global equity markets are up 2.6 per cent in the year-to-date with the US outperforming the global benchmark. Photo: AFP
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