Are we headed for a bear market?

Pic By HUSSEIN SHAHARUDDIN

Against a backdrop of rising interest rates in the US and equities hitting fresh lows, it’s hard for investors to not think this may be the beginning of the bear market.

As the US Federal Reserve (Fed) has embarked on a gradual path in the current rate hike cycle as to preserve US economy’s growth momentum, a key reason to observe will be inflation.

Inflation has started to trend higher as US consumer spending has finally gained traction.

While there is now an increased possibility of a faster pace of rate hikes, we think investors can draw comfort from the Fed’s transparent and forward-guiding communication stance.

Monetary decisions in the US front are unlikely to induce volatility on global equities.

Given the Fed rates are now sitting comfortably above zero, the Fed now has more monetary flexibility to deal with any unexpected event to economic growth.

Global equities posted hefty declines last month after the US President Donald Trump administration instituted tariff barriers against China, Canada, Mexico and the European Union. The trade policy conflicts are a major source of uncertainty for the global economy and financial markets.

At this juncture, we have yet to see the materialised impact from increased tariffs, as trade figures across the globe are still showing healthy signs of global aggregate demand.

Leading indicators such as the Morgan Stanley Global Trade Index are also holding up well.

Although many have forecasted increased tariffs are likely to have a limited impact on gross domestic product growth, an escalation of tensions between major economies is likely to lead to more significant market disruptions in the months ahead.

Hence, the current decline across markets is not tied to any material change in the fundamentals of the economy or significant downward revision in earnings estimates.

That leaves us with an opportunity to look into regions and countries that offer decent growth potential.

The rally in financial markets last year was built on the recovery of the global economy, as well as record profits posted by companies.

Many of the previous crashes were led by the irrational exuberance which gave rise to a bubble in asset prices.

The tech crash in 2000 and housing bubble in 2007 were built on euphoric sentiment rather than improvement in asset fundamentals. Eventually, the subsequent sell-off led to severe losses.

Most of the current concerns are stemming from policy wrong footing, particularly on the global trade front.

Our base case is that there will not be a full-blown trade war, doing so would choke off precious growth momentum that various policymakers have been struggling to revive over the past few years.

Looking at pre-crisis valuations in the past, we have yet to see asset prices derailing from their respective fundamentals.

We think this is important to look out for because steep drop in asset prices and loss in portfolio values are irreversible.

That said, we think markets are not headed for a bear territory yet.