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Equities

The Bull Market Turns 10 Year Old – What next?

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Citi’s Bear Market Checklist (BMC) shows only 4 out of 18 red flags, and suggests that it is too early to call the end of this ten year bull market.

 

In previous cycles, the BMC red flags have accumulated gradually before rising exponentially in the last year of the bull market. Citi analysts would be more concerned when 7-8 factors are flagging caution.

 

The recent rally has made global equities look more expensive. Citi analysts have even turned one valuation factor (trailing Price-to-Earnings) amber. But share prices would need to rally another 20% for us to move our dividend yield or CAPE factors to red.

 

The recent drop in bond yields on the other hand, has pushed our global equity risk premium (ERP) higher (ie equities look cheaper) in recent months. With bond yields at current levels, it would take a 30-40% rally in global equities to turn the ERP red.

 

 

Other factors will have to move even more for the BMC to turn cautious. Equity fund inflows would need to pick up sharply. M&A and IPO activity would need to double. Capital expenditure (capex) would need to pick up sustainably. Global Return-on-Equity (RoEs) are already high, indicating caution, but Earnings-Per-Share (EPS) would need to be 10-15% higher than current levels to raise a red flag.

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