In an environment of loose monetary policy and low interest rates, equities have added considerable value to portfolios over the past decade. Our latest research paper questions whether this prolonged equity rally is sustainable as we transition in to a more uncertain investment climate.
Equity markets have added considerable value since the global financial crisis in September 2008.
For the most part, this prolonged equity rally has largely stemmed from unprecedented low interest rates and quantitative easing (QE); as opposed to strong market fundamentals (e.g. corporate earnings). Importantly, equity markets look expensive across a range of metrics.
The current equity ‘bull run’ in the US is developing in to the longest in recent history. Previous prolonged equity market cycles have typically ended with severe market downturns or shocks.
Examples include, the 2000 ‘tech’ crash and the 2008 Global Financial Crisis. Though each of these market crashes were triggered by distinct events, they carried a common theme of a mispricing of assets and risk relative to what fundamentals would suggest.
Recognising the current environment, this paper analyses the factors supporting further equity growth and contrasts these with the key risks we believe equity investors should consider. On balance, we see more downside risk than upside potential over the next three to five years.
We acknowledge that many investors focus on the long-term investment horizon and are comfortable with riding out short term volatility. However, for some investors managing medium term volatility is critical. Taking this in to account, we set out a range of options available for those investors who wish to maintain an exposure to equities but also have a desire to manage risk.
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