After the bear market of 2022 helped “cleanse” the financial system, investment executives maintain an optimistic outlook for equity markets, which they say can be buoyed by a changing macro environment.
According to Munro Partners’ chief investment officer, Nick Griffin, the outlook is “quite frankly, pretty good” for at least the next three years.
Speaking at a GSFM media briefing in Sydney last week, he observed the bear market triggered by monetary tightening, lifting interest rates from virtually zero to almost 5 per cent, “effectively cleansed the financial system” and paved the way for a sustained upcycle.
“In my experience, a really simple observation – when you cleanse the financial system of all its excesses, which you just did in 2022, you generally have a long period of calm afterwards,” Griffin said.
Similar instances have been observed, he elaborated, in the years between 2002 and 2007 following the dotcom crash and 2009 to 2018 following the global financial crisis, and it remains “incredibly encouraging” that the recent rate hike cycle since 2022 has not triggered a recession.
“You’re now in a situation where central banks have normalised rates, the economy has not imploded, and you ultimately have an economy that’s bouncing along the bottom. Central banks basically have 500 basis points up their sleeve to manage a very long and sustained upcycle from here,” he said.
With this, Griffin posited markets are at least a year into the next sustained period of growth.
Already, some of the world’s largest companies have demonstrated strong earnings growth through the recent down cycle, reinforcing “the equity market is not the economy”, he pointed out.
A number of thematic trends have helped foster earnings, such as chipmaker Nvidia with artificial intelligence, and pharmaceutical company Eli Lilly with GLP-1 agonists that are now FDA-approved for treating obesity, he said, and this “very narrow” earnings growth will broaden out as the macroeconomic picture changes.
“Interest rates have peaked, and so from here, rates are either flat or down, and earnings will grow,” Griffin said.
“Right now, earnings growth is very narrow among the biggest companies, but that will ultimately broaden out, because at some point, central banks are going to cut rates and the economy is going to recover.”
All this has strengthened the argument for the next bull market cycle and has seen Munro Partners “fully invested” for well over a year.
“All our funds were up over 35 per cent on the last 12 months on a rolling basis. That’s a big number – but it’s important to flag that you’re coming off the bottom of 2022. That’s what you’d expect in the first year of a bull market,” Griffin said.
“Going forward, returns won’t be as good as that, but they should still be positive.”
GSFM investment strategist Stephen Miller also believes recent market performance has been less reflective of a macro rally.
“The consensus view at the commencement of 2024 was one commonly described as ‘Goldilocks’, a resilient economy in which inflation declines to an extent that central banks can make significant cuts to policy rates,” he said.
“This is an ‘immaculate disinflation’ scenario in which bond yields fall and equity markets are pushed along by powerful tailwinds associated with central bank easing and falling bond yields and continuing economic growth.
“Certainly, ‘Goldilocks’ has propelled US equity markets to all-time highs. However – at least until very recently – that has been more reflective of a thematic and relatively narrowly based rally focused on technology rather than a macro rally excited by immaculate disinflation and attendant central bank easing and falling bond yields.”
Looking ahead, he said it was “entirely plausible” a thematic rally could persist, although the degree of its next run remains contestable.
Importantly, though, with the US Federal Reserve and bond markets now better aligned in terms of rate cut expectations, inflation seemingly on a downward trend, and activity growth appearing to cool, Miller said it is “hard to see” macro elements derailing the current trajectory.
“In other words, the ‘macro’ dynamic potentially reinforces the ‘thematic’ elements that drove the first half rally in risk markets,” he said.
Miller added the macro environment is “almost incidental” to what investment executives are looking for in their respective markets, ahead of the US elections and a potential Trump victory.
“[The election] might matter at the margins, but I think there are bigger things happening, whoever is president,” he said.
