With the S&P CAPE trending upwards, RARE said the current point is only lower than two other times in history, the eve of the 1929 crash prior to the Great Depression and at the height of the Dot Com bubble in 1999/2000.
“We have been of the view since early 2018 that markets are in the late stages of a bull run that commenced in March 2009,” said Nick Langley, co-CIO and co-CEO, RARE Infrastructure.
“While we are not calling an economic recession, we believe it is prudent to resist the urge to ride the bull right to the inevitable end and to begin moving portfolios to a more defensive posture.”
Mr Langley listed a number of reasons the firm is encouraging a cautious view, with bi-partisan support in the States for containment of China.
“The ‘get tough on China message’ is one of the few issues President Trump has been consistent on. He has leaders of the Republican nationalist protectionist branch’ heading his trade charge, namely Robert Lighthizer,” he said.
“In short, we don’t see the trade war ending any time soon, and importantly, we see it potentially impacting on global economic growth and ultimately S&P 500 earnings.”
Mr Langley also said there would be more volatility in the markets as a transition from quantitative easing to quantitative tightening takes place.
“Unlike what happened in January this year, the FANGs (Facebook, Apple, Amazon, Netflix and Google) have not reasserted leadership and led a bounce back in markets,” he said.
Mr Langley added monetary conditions are tightening, the yield curve appears heading for inversion and he expects the ‘sugar rush’ from Trump’s cuts will start to wear off this year.
“Despite all this, the US does have a head of steam, and there is a reasonable chance President Trump and the Democrats will agree on an infrastructure centred stimulus,” he said.
“Accordingly, while it may be premature to reduce equity exposure too drastically at this point, we believe taking a defensive equity exposure is prudent for investors in this market. Infrastructure stocks are one key way investors can achieve this.”
