Financial adviser Martin Hawes argues a stock market crash isn't looming, so remains bullish; Says now isn't the time for nervous investors to adjust their risk profiles

“Global financial market volatility has awoken from its slumber,” in the words of ANZ economists.

US equity markets are down around 9% from their all-time highs, with European and Asian markets in similar states.

After holding near historic lows for the majority of 2017, the VIX measure of US equity volatility has spiked to its highest level since 2011 (bar a brief period in 2015).

ANZ economists, in their latest Market Focus publication explain: “Ultimately it appears that markets have finally come to the realisation that abundant global liquidity conditions are not going to last forever…

“Global growth momentum is strong at present, and this is leading to speculation that inflation is finally set to make a comeback, particularly in the US.

“Indeed, US average hourly earnings growth, at 2.9% year-on-year in January, is at its highest level since 2009, which has helped cement expectations for ongoing Federal Reserve policy normalisation.

“The US 10-year bond yield is now at 2.85% – effectively the highest in close to four years…

“The Bank of England surprised last week with a more hawkish tone than anticipated, noting that monetary policy will “need to be tightened somewhat earlier and by a somewhat greater extent” than previously expected.

“The European Central Bank still appears to be inching towards the exit door. These normalisation signals are broadening.”

Not the time to reassess your risk profile

So with uncertainty around the pace at which interest rates will be hiked spurring market volatility, what should retail investors do?  

Summer KiwiSaver Investment Committee chair and Authorised Financial Adviser, Martin Hawes, says this isn’t the time to reassess your risk profile.

“If you are feeling uncomfortable with the amount of volatility and the way your portfolio is going, you need to wait until this settles down and then reset your risk,” he says.

“Effectively to change your setting at the moment is to sell into weakness.”

Hawes recognises some believe the current market weakness is a precursor to a crash. However, he doesn’t see this happening.

Rather he sees markets settling down in a matter of weeks or months, so remains bullish.

Ultimately, he believes “the fundamentals are still in place”. World economies and companies’ profits are still growing strongly. Interest rates also remain low.

Volatility drivers

Hawes is of the view that despite China’s rising influence, the US economy continues to have the greatest impact around the world.

The notion, ‘when America sneezes, the rest of the world catches a cold,’ isn’t going away anytime soon.

Hawes accordingly recognises markets may be spooked by the prospect of the Federal Reserve raising interest rates in the US five or six times this year.

He maintains that if the Fed Board of Governors’ new chair, Jerome Powell, came out and said rates wouldn’t be hiked more than three times, markets would calm down.

He notes that in addition to strong US jobs data dashing expectations around gradual rate rises, having a new chair in the driver’s seat is increasing uncertainty.

Hawes also accepts the share market is letting off some steam, further to it getting ahead of itself. 

Finally, he maintains high frequency algorithm trading has exacerbated market volatility.

“Large numbers of these algorithms are working on the basis of momentum. If the market is going down, many of the algorithms will automatically start shorting, and that will magnify the extent of the fall.

“It does it on the other side as well. In January, when markets ran up pretty strongly, I suspect that was again magnified by algorithm trading - robots really.”

Overweight on international, neutral on NZ

In line with his view that we’ll see markets bounce back soon, Hawes believes now is a good time to buy.

While he sees an uptick being “reasonably synchronised” across markets, he continues to favour international equities over New Zealand and Australian ones.

With global shares - European ones in particular - languishing, they’ve been better priced relative to shares on the New Zealand market, which has had a very good run.

To further allay investors’ concerns, Hawes makes the point that investors (like those in KiwiSaver) who make regular contributions, should take comfort in the fact they’ve been getting bang for their buck, purchasing more shares at lower prices in recent weeks.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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34 Comments

“Effectively to change your setting at the moment is to sell into weakness.”

So using this logic, you would never execute a stop loss. That doesn't seem like a winning long term strategy to me.

Ultimately, he believes “the fundamentals are still in place”. World economies and companies’ profits are still growing strongly. Interest rates also remain low.

Seems a bit of a contrast with John Mauldin's more maudlin measurings.

I suggest the difference lies in the time frames they are speaking to. No doubt debt has to be paid, but the current situation could go on for years and years before consequences get very serious.

In the short term Mr Hawes is probably correct, in the long term Mr Mauldin is probably correct.

Mr Maudlin provides some interesting sums that go beyond rhetoric, so it will indeed be interesting to see how short 'short term' is and how soon 'long term' arrives, especially with the Fed already unwinding.

Quite reassuring. Thanks to the author.

Martin Hawes 22/5/17

"I do not have a perfectly functioning crystal ball and so I'm not certain an economic or market crash is coming (if I was I would sell everything). Nevertheless, I am concerned enough by the risk of a fall to cover the possibility"

"I have sold down because it appears to me that shares do not offer sufficient reward for the risk at the moment. At the moment, share prices are high both internationally and in New Zealand. It is difficult to imagine there will be any great rise from these quite high levels........"

https://www.stuff.co.nz/business/opinion-analysis/80131785/Martin-Hawes-...

Have you not sold down a bit rastus? Taken some profit to balance your portfolio?

yep. About 6 months ago sold out 50%. Recently changed a kiwi fund into cash from growth. Thinking about getting some gold.

A brave call from M Hawes

Good article thanks Janee - appears Dalio has a similar outlook to Hawes - although it appears Dalio is shorting a lot of European stocks at present.

That's right. Bridgewater is very skeptical of everything, particularly European manufacturing. If Ray Dalio is playing the media, that doesn't bode well. He is typically a sincere individual.

Thank goodness we have different risk profiles as investors .

This bloke is , in my humble opinion .......... wrong .

Asset prices have become disconnected from reality , there is more debt out there than fish in the sea , and central banks keep printing . Household debt , government debt and corporate debt are at levels never seen before , its not sustainable if just one number in the equation changes we are in trouble.

If interest rates go up by just 1 % it will dramatically affect anyone with debt , and especially companies with debt as they are forced to service higher borrowing costs , and this will reduce profits and dividends .

We have some companies on the major world stock markets with PE ratios of 20 up to 100 ........... 20 to 100 years to get your money back .

How dumb is that ?

Good for you for saying that you think he's wrong and being humble about it.

Good points Boatman -so where do you put your money given conditions? Bonds umm no. Property ummm maybe not. Cash mmmm risk/return (OBR?) Dividend paying shares? Not a bad option - especially if well diversified (in currencies/industries)

Boatman,

So now you're a stock market expert. Do you know how to calculate a P/E ratio? Are you really telling us that accompany lie say Mainfreight is trading on an absurd ratio? Have you seen their balance sheet?

What about F&P Healthcare? I was there yesterday with the NZ Shareholders' Assoc and have been a shareholder since 2004. have you seen their balance sheet. They trade on a admittedly demanding multiple,but they are a world class company,with the earnings growth to back it up.

I don't think you know the first thing about the stock market.

Ha.... deep shock, finance person under 45 says "buy the dip" - please tell me, dear heart, when did one such EVER say "sell" or "sell, it will go lower" ensuring small fry get burned whilst the professional big boys sell early

Martin can you please explain why on the 3rd of January this year, there was an 80% crash in Interbank Lending between all Commercial Banks in the space of one week, from December 27th 2017 to January 3rd 2018. This has happened two other times in recent history: September 12th 2001, September 17th 2008 both as a result of major events. It would appear that some of our global banks have had a loss of confidence in lending to each other. This can't be good. Here is the link to an amazing historical graph. Incidentally, this graph has not been updated since the event on 3rd January. Usually an event like this preceeds a major credit crunch and liquidity crisis. https://fred.stlouisfed.org/series/IBLACBW027NBOG

Yes, this is very interesting but not being reported. Don't scare the sheeple I guess.

So that's interesting - am I seeing things or is the data between 27 Dec and 3 Jan - that was shown yesterday as that crash you describe, now no longer showing on the chart?

Wow! You are right. I just checked the graph again and it has been deleted, yet this event did happen because it was reported via several other various sources which led me to the graph. Now today it has been discontinued. Interesting indeed.

Tainui - any idea how this type of data is tracked/recorded?

The only knowledge that I have on tracking the data, is that every Wednesday weekly the stats were being reported for years... way back to as far as the 1960's at least. When I checked the graph a few days ago it showed an 80-81% drop of interbank lending from 27.12.17 - 03.01.18 and then yesterday the graph was updated with a notice stating that this graph has now been discontinued. Read into that what you will. It may be the reason why the sudden drop happened, or something else is going on. Other than that I have no other explanation.

Have you considered the possibility that Banks have 31 December balance dates and therefore want to dress the balance sheets to have the least reliance on other banks as at year end?

No I didn't consider that, but banks are required to report their stats on a regular basis and not all banks have the same reporting timeframes. For example in NZ, ASB has an entirely different reporting timeframe when it comes to reporting their profit margins compared to the other 3 banks: ANZ, BNZ & Westpac which are first cabs off the rank.

The link you gave was to the American banks. The end of year is called the ‘turn’. In the ‘80s (when I was in the Markets) it was often illiquid and the risk is magnified by the number of days. You can get spikes by just a few banks trying to dress balance sheets or square up a short position. It’s not necessarily indicative of any stress.

Thanks Ex Expat. That makes sense.

It's because of FED funding, banks don't need each other any more.

"Summer KiwiSaver Investment Committee chair and Authorised Financial Adviser, Martin Hawes"
No fund managers ever say sell, as they stand to lose their 1-2% pa they tax you for speculating with your hard-earned

Tis a reminder that NZ Kiwisaver fund fees are ridiculously high. Quite the rort.

‘when America sneezes, the rest of the world catches a cold' Well ok. But also consider the US has more than a cold. It's actually really really sick. Debt cancer up to the eyeballs, it's terminal and only a matter of when.

This week's US CPI print will settle things once and for all.

I see China's central bank just issued a record 2.9 trillion Yuan of new loans last month (640 billion NZD) to keep their economy afloat. Why is it that I cant afford a house in Auckland again?

How much of that 640 billion will find its way into the corruption circuit and eventually into western property.