Opinion: Bull Market Still Has Legs
April 17, 2018 | BY Min Lan Tan
The stock market is rife with uncertainty this year, but bullish elements offer opportunity for savvy investors
The world’s stock market have had an eventful run of late. The sell-off in early February, during which the S&P 500 fell 11.5 per cent from peak to trough, was likely more a correction within a rising market than the start of a sustained downtrend. After such a long and uninterrupted rally, an adjustment like the one experienced is not unheard of – there have been 23 bull market corrections of this nature since 1940.
However, the worst of market volatility is past and extreme investor positioning has reset. That said, the exceptional Goldilocks environment of 2017 has also likely ended and in its place is a less certain world, one with higher and more variable inflation and tighter central bank policy.
Still, crucial bullish elements remain: economies are growing above trend, interest rates are only rising from low levels and earnings are surging.
With corporate earnings expected to grow by a rate in the low teens globally, we remain overweight on global equities and advise investors to keep their risk-on stance. Valuations globally and in Asia have become more attractive following the sell-off. This makes for an opportune time to increase exposure to emerging markets, which are supported by strong global growth, rising commodity prices and a falling US dollar.
In Asia, favourable economic conditions and structural reforms should continue to buoy Chinese stocks in the near term. Meanwhile, Indonesian and Thai equities should perform well in the current market landscape.
While risk assets are poised for another good year, investors should take steps to navigate the changing market dynamics driven by the inevitable reappraisal of US inflation and the Fed’s policy rate. Investors could look to partially hedge their portfolios from extreme spikes in volatility by buying 10 per cent out-of-the-money put options on the S&P 500. Investors could also buy the Singapore dollar, which is managed on a trade-weighted regime, and sell the US dollar to benefit from the greenback’s weakening trend.
Min Lan Tan is the Head of Chief Investment Office for APAC, UBS Global Wealth Management.
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