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Potential end to 9-year bull run requires investor prudence

18 January 2018

The nine-year bull run may be coming to an end and investors should be prudent in their asset allocation, according to Aegon. 

The pensions and insurance provider looked at the end points of the previous four bull runs – 2002-2007, 1990-2000, 1987-90 and 1982-87 – and examined common themes and differences for clues as to how and when this latest bull run could end.

It found that similar to previous bull runs, a key theme is rapidly rising valuations in the five years before the end of a bull run. This latest bull run, it said, has shown “high price to earnings ratios”.

According to Aegon, the market is witnessing a dominance of technology companies today similar to the unprecedented highs in tech stocks just before the burst of the dotcom bubble in 2000.

However, the intervention of the central bank to shore up economies has introduced an unprecedented element to the mix, while a ‘good’ Brexit victory while positive for the UK economy is likely to be negative for asset values of FTSE 100 stocks, which generate around 70% of their earnings outside the UK

Nick Dixon, Investment Director at Aegon, says: “While we’re currently enjoying the second-longest bull run in recent history, the strong performance of equity markets, and the US market in particular, has exceeded improvements in economic fundamentals. This, along with other indications, indicate that the current bull run may have run its course.”

As a result, Aegon says asset allocation needs to take a “prudent” approach in the current environment.

The company suggests a reduction of exposure to US equities, in particular tech stocks, but says emerging markets are relatively more attractive as a result of lower equity prices coupled with higher growth potential.

Fixed income, particularly government bonds in developed markets, are likely to come under pressure as central banks unwind quantitative easing and there is a risk of interest rates rising higher and faster than the current yield curve. As such, Aegon describes itself as cautious on fixed interest and underweight in developed market government bonds.

In contrast, cash has become relatively more attractive. Aegon says that with a “good” Brexit more likely than not, sterling is an attractive option to reduce aggregate portfolio risk.

Aegon chart source: Morningstar

 

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