"Every stock market cycle has a bubble," says Markus Schomer, chief economist for asset managers PineBridge Investments. "This business cycle it is bitcoin."
In US dollars, bitcoin has increased in value 1,540% over the past year, and to Schomer, this is a warning sign that the market is becoming overheated. However, he says that global stock markets are not yet in crisis, and risk assets should continue to deliver positive returns to investors in 2018.
“When stock markets get optimistic, investors get euphoria – bitcoin fits that narrative,” he says. “We are nearing the end of the bull market, but it will not collapse this year.”
While he says investors should not expect the stellar returns of 2017, he says it is “wrong to go against a trend”, and momentum will carry stocks higher this year.
When Should Investors Worry?
Over the past year, manufacturing indices and trade are up – despite President Trump’s stance on globalisation – and, bar the UK, growth forecasts for 2018 are positive for most major economies. This paves the way for a change of tack in central bank policy.
“In 2012, the world was concerned with deflation risk and sluggish growth, and central banks have deployed quantitative easing and negative interest rates to stimulate both,” says Schomer. “We have moved away from this environment – last year saw synchronised economic growth across the globe, but we have not yet seen a normalisation of central bank policy.”
But where the Federal Reserve has led, others are sure to follow. The Fed has signalled a couple of rate hikes this year, but the effects on global markets has been muted. Once other banks begin to raise rates, Schomer expects equity markets to be disrupted.
The inflection point? Quantitative easing will come to an end in 2019, and the European Central Bank is expected to begin raising rates next year too.
Where Will Deliver Returns in 2018?
Schomer says that there is a strong theme of growth for 2018 – but investors should be selective when looking for opportunities. Unlike in previous years, this is not a broad optimistic play. In particular, he is muted on his outlook for US equities, preferring emerging markets instead – where sentiment is more positive.
“Even though we are seeing a rebound in business investment, animal spirits are quite depressed in the US,” he says. “People are still not over the great recession. Look at aeroplanes in the US – they are full, over-booked, but are the airlines buying more planes? No. They are just filling up the ones they have. They do not want to invest.”
Emerging markets are more compelling from a valuation prospect too.
“Relative valuations are skewed because of quantitative easing. Emerging markets have significantly lagged developed ones since QE was introduced,” he explains. “Asia markets gave you 30% last year. They could do the same again – emerging markets will certainly outperform developed ones. They are cheaper, and the fundamentals – demographics – on the whole are more supportive.”
