Geoff Cutmore - Morning Thoughts

Is the bull dying?

Geoff Cutmore

We are preoccupied with the death of the five-year equity bull market. Is this it? Are we witnessing one of those major trend turning points that are profitable for the brave and painful for the meek? Owning the market has worked -- but just as the bears capitulate there is a reminder of why they have been bearish.

The Bear Stearns news over the weekend has done nothing to calm the nerves. An executive leaves, but it is not the full stop, or line being drawn under the problem that the markets were looking for.

So what words of wisdom from our guests this morning? We took an editorial decision to look more closely at the activity in the emerging and high-yield part of the market The reasoning was that the riskier end of the investment spectrum would give us a good read on the degree of de-leveraging that is taking place.

Stuart Culverhouse, an economist at Exotix, argues there has been no selloff in emerging markets worth getting concerned about. Yes, spreads on EM Soveriegns have widened, but not massively so. While there has been some buying of protection and re-positioning, he thinks the lack of contagion is a positive for the longer term EM investor. He suggests the less liquid and more exotic emerging credits in particular have withstood the weakness in higher-grade EM credits. In effect, this is because the lack of liquidity prevents panic selling. He is positive on markets like Nigeria, Kenya and Uganda.

Our guest host, John Cleary, a buyer of emerging equities, says he would rather sit this one out. Raising cash levels is the safe policy and he advised selling on any rallies while this volatility continues. His remit is to achieve absolute return and he argues that preserving capital is more important right now than chasing returns. That goal may switch again when there is more clarity about the size of credit market exposure, but for now he is happy being more conservative in his approach.

The dilemma for the bears right now is that economic growth remains robust and the global growth story still well supported. Is this an environment in which to get too negative? Equity investors are definitely going to have to live with higher levels of volatility, so the real question is how hot can you stand it?

The consensus from our guests continues to be that this is not the big trend turn, but investors need to be prepared to see lower returns in more challenging markets. Happy days!

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