[Editor’s Note: Asset managers always have different views on the outlook for global sharemarkets. Some might be bearish. Some might be bullish. In this feature, Platinum has a bearish view on the outlook for global equities. Do further research of your own or talk to a licensed financial adviser before acting on themes in this article. This information in this article presents a general view of markets, and might not suit your investment needs.]

Here are five key questions for investors in global equities:

1. Are we in a serious bear market? 

Yes. Platinum believes investors should be aware that what is happening right now is the implosion of one of the great equity market bubbles of all time in the US. 

Much of the commentary Platinum sees can be summarised as “everyone is so bearish … so here is what to buy”. 

Many commentators continue to look for a:

• peak in inflation;
• US Federal Reserve pivot (reducing the pace of interest rate rises);
• sharemarket bottom; or 
• any other reason to rush back to stocks, especially those that have led the move higher. 

This is unlikely to be a good idea. 

In Platinum’s view, markets are some way toward correcting the worst valuation excesses of the “everything bubble”. 

Investors must now deal with what Platinum views as very likely damage to the real economy in the US, and consequent impairment of company earnings. This market cycle is ending, and it remains time to focus on capital preservation, as Platinum has been saying for over a year. 

Note that Australian equities, like most of the world, have done little over the course of “the everything bubble”. The S&P/ASX 200 Index is roughly where it was 15 years ago. 

US equities have outperformed the rest of the world by more than 250% cumulatively over the last decade [1]. For a major market to achieve this is quite extraordinary in modern market history, surpassed only by Japan’s outperformance of the 1980s in our reckoning. 

Platinum views a repeat of US outperformance in the next market cycle to be unlikely. 
 

2. How far will markets fall? 

Platinum has said quite clearly that this does not look like a “garden variety” bear market. Platinum expects the S&P 500 Index (a key barometer of US shares) to be down perhaps 50% from its peak. The Nasdaq Composite Index (a barometer of US technology and other stocks) could fall more. The period 2000-2002 is a reasonable reference point. 

It is also worth noting the performance of Australian equities during the Tech Wreck this year. US markets halved, while the ASX All Ordinaries fell approximately 17% [2]. When you don’t get to party too hard, you avoid much of the hangover. 

3. When do markets bottom? 

Platinum believes it is unlikely there will be a bottom reached in global equities for quite some time – bear markets take years, not months. 

The kind of progress toward a market bottom that Platinum expects to see is: 

• Unemployment has begun to rise meaningfully,
• A recession has been called,
• There have been high-profile bankruptcies in the corporate sector,
• There is significant consolidation activity occurring in the tech sector and other previously hot areas as prior market darlings are acquired at a fraction of their peak values,
• Retail participation in markets has fallen significantly,
• Margin debt in markets has fallen significantly over many months, and
• Multiple, large corporate scandals come to light around accounting irregularities and securities fraud.

4. Will there be a Fed pivot? 

As George Soros (a famous investor) might say: investors’ “prevailing bias” appears to be that if interest rates fall, everyone can happily rush out and buy the leaders of the move higher in recent years – tech stocks in particular [3]. 

Platinum makes two points here. First, the Fed is unlikely to pivot until inflation is meaningfully lower and this requires wage growth to fall significantly. This was made abundantly clear in the minutes of the September meeting of the Federal Open Markets Committee [4], released on 12 October. 

Measures of core inflation in the US remain stubbornly high, and now inflation appears well embedded in wages [5]. Those pointing to declining commodity prices as signs that inflation is falling and therefore a Fed pivot will follow quickly will be disappointed, Platinum believes. The Fed is expressing a will to fight a protracted war against inflation. 

Second, by the time the Fed starts cutting rates, there is every chance that real damage has been done to the US economy and consequently, earnings will drive ongoing market declines. Further, people who have lost their job, or are worried about that fate, do not “buy the dip”. 
 

5. What can I own? 

In the near term, Platinum is focused on preserving capital, by holding cash and using shorts. For a retail investor, the best asset allocations in times of elevated market volatility and large market declines are cash and patience, in Platinum’s view. 

Over the longer term, Platinum is looking forward to what we think will be a very different cycle. Central to Platinum’s thinking is the under-investment apparent in basic industries. Over the last decade, upstream oil and gas capital expenditure has roughly halved [6] – this makes energy exposures very interesting over the longer term. 

Similarly, mining capital expenditure has roughly halved [7], and this is just as the world needs ample supply of metals such as copper and nickel in order to meet vehicle electrification targets. 

Since the heady days of the mid-2000s, global foreign direct investment has fallen 60% in recent years [8], amid the Trump trade war and then COVID-19. This speaks to some measure of de-globalisation, but also in large part to simple under-investment in supply lines and manufacturing capacity, making many industrial exposures very attractive over the longer term. 

All major global market indices are constructed around huge weightings to the US – the MSCI All Country World Index is weighted 62% to the US, for instance [9]. 

After a decade and more of massive outperformance by the US, culminating in one of the great equity market bubbles of all time, Platinum believes investors will need to hold very different exposures in the next cycle to those that worked in the last one.