AMP Capital head of investment strategy Shane Oliver said while there have been numerous warnings of corrections and crashes in regard to the share market, AMP Capital believes it is too early in the investment cycle for a new bear market or crash to occur.
Mr Oliver said AMP Capital believes the investment cycle is still in phase two of the cyclical bull market, where profits are strengthening but there are not yet signs of investor euphoria.
One of the concerns often noted about US shares is that they have hit record highs, said Mr Oliver.
“However, just because US shares are at a record high does not mean a crash is on the way,” he said. “The breakout last year came after a 13-year secular bear market.”
AMP Capital believes US shares have entered a secular bull market boosted by a range of factors such as “an energy boom, a manufacturing renaissance and a return to better health for US debt measures”.
Mr Oliver said the surge in the share market has also been supported by a surge in profits to record levels.
He said another concern is that US shares are overvalued given that Shiller PE is now 23 times.
While this is well above the long-term average of 16 (based on figures dating back to 1881), Mr Oliver said the equilibrium has likely risen slightly since the 1880s anyway given that shares are easier and cheaper to trade.
“Shiller PE is only marginally above its long-term rising trend, suggesting US shares are not particularly overvalued,” said Mr Oliver.
The decline in volatility in US shares has also been seen as concerning, he added, and according to AMP Capital there has not been a 10 per cent or more correction in US shares since mid-2012.
However, Mr Oliver said that in many ways this is a good thing: “It is far better than the extreme volatility seen through the GFC and its aftermath and worrying about it is perhaps a bit like worrying that there is nothing to worry about!” he said.
Mr Oliver said the main concern is that low volatility could lead to a “false sense of investor security and excessive risk taking”.
“However, the low level of volatility is arguably a rational reaction to the more stable macro-economic environment seen in more recent times,” he said.
