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Hang Seng Index

Beware the hangover after long-running stocks party comes to an end

With the bull run in global equities nearly a decade old and valuation running ahead of fundamentals, the words of JPMorgan chief are worth remembering

PUBLISHED : Wednesday, 06 September, 2017, 2:45am
UPDATED : Wednesday, 06 September, 2017, 2:45am

It has been nearly a decade since the collapse of Lehman Brothers in the global financial crisis. Now, the go-go mood among investors is on again. Every month in Hong Kong and elsewhere, the property and stock markets seem to be reaching new heights. Fundamentally, the world economy is in recovery but still not in the best shape. At times like this when people start taking on greater risks and increasing leveraging, investors, particularly retail ones, need to exercise caution.

Hong Kong stocks power to 26-month high

As JPMorgan chief executive officer Jamie Dimon used to say, every seven to 10 years, something horrible happens to the capital markets. Well, remember Black Monday in 1987, the Asian financial crisis in 1997, the dotcom implosion in 2000, the global financial crisis in 2007 ... The bull market in global equities is now almost a decade old, making it one of the longest in post-war history. In the past 10 years, every rally was greeted with scepticism and distrust; not any more though.

Riskier behaviour and assets are back. In Hong Kong, the Hang Seng Index recently breached the 28,000 points level, and more than a few technical analysts are claiming 30,000 to be achievable by the end of the year.

The Vix, the so called fear gauge on Wall Street, has been hovering around 10, a record low. This implies the outlook for the US economy and capital markets is more stable and benign than anything seen in the past 24 years. This hardly seems right when you consider the geopolitical risks from the unpredictable Donald Trump White House to the sabre-rattling of North Korea with its missile tests; China’s debt bubble and slowing growth, and uncertain economic and political outlooks for the European Union.

To be sure, the US economy has been expanding for eight years. The International Monetary Fund and other economic groups have predicted a healthy global growth this year. The Federal Reserve is tightening, but still doing it cautiously. But the Bank of Japan and European Central Bank are still propping up the market by injecting massive liquidity. Meanwhile, China’s economy has outpaced its overall 2017 growth target in the second quarter, and the IMF has revised upwards its growth forecasts for this year and next.

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An eerie calm usually precedes a storm. Of course, just because everyone seems to be having a good time doesn’t necessarily mean something bad will happen just now. The party may be just heating up. But it does mean share prices are riding high as valuation runs ahead of fundamentals. Many economists and analysts agree valuation today is high by historical standards. A big fallback, even without a full-blown collapse, can still hurt a lot.