Hui finds this year has been very strange. For example, historically, the Asia equities market normally gets a pullback of around 10-15% per year, but so far it has only been 3%.
“It is very unusual in terms of the lack of correction in most global equity markets. Overall, the volatility environment has been very low,” he said during a media briefing earlier this month.
He attributes the low volatility environment to a very accommodative policy by global central banks, the growth in the global economic environment that investors have not seen in the past five years, and the lack of any major economic or financial threat that could cause investors to panic.
“The market is not necessarily complacent, and to me the calm is reasonably justified.”
Hui noted there’s always a risk of a market correction. “I can’t tell you with any degree of confidence or accuracy when that will come.”
He added that he is still cautious on some potential trigger points. One is geopolitics, such as rising tensions between the US and North Korea. Currently, market reaction continues to be limited as there have been no major economic consequences of the threatening language on both sides.
If North Korea takes military action against South Korea or Japan it will affect the shipping lanes around the Korean peninsula. “That’s a problem that becomes an economic issue.”
Another trigger point is if the Fed takes a more aggressive stance than investors expect in tightening monetary policy.
The markets have been pricing in one or two more hikes over the next 18-to-24 months compared to the three or four from the Fed’s perspective.
“It’s not like [the Fed] wants to raise rates eight times a year, but they just want to alert investors that this is not one or two times a year and it may be two to four times. But if they do become more aggressive in signalling, that clearly could upset the market.”
Expensive US equities?
Separately, Hui also discussed whether the high valuations of US equities are justifiable.
Since 2008, valuations for the S&P 500 have reached a record high. The forward price-to-earnings of the index is at 17.7, which is higher than the 25-year average of 16.
“But I would argue that the imminent threat of a US market collapse is not on our doorstep.”
Although Hui acknowledged that current valuations are not cheap, he said that it is supported by record high earnings in the US.
Source: JP Morgan Asset Management
He added that US companies are expecting to grow their earnings 5%-8% in the next one-to-two years.
“If the US is not facing a recession in the next 12-18 months, I think the equity market should still be stable. It may not provide great returns, but it will be stable.”
However, Hui noted that investors might be more attracted to global ex-US equities and expects that they will outperform the US market over the next one-to-two years.
This year, the firm has been recommending that clients allocate more to European equities.
“The European economy has been improving and catching up to the rest of the world, but its equity market hasn’t. So that to me is a very strong argument for the European equity market.”
This year, Hui expects US equities to be “stable” and European equities to outperform the S&P 500. For Asia equities, Hui believes that there is still more upside because of earnings improvements, adding that it is still not too late for investors to participate in the Asia bull market. The FTSE Asia ex-Japan equities is up 30% this year.
