Rougher ride ahead, says Oliver

Enthusiasm at the strong gains in equity markets since the March 2009 lows may be tempered by a change in the investment cycle as gains are not so easily made, according to AMP Capital Investors’ chief economist, Shane Oliver.

Oliver stated in his weekly e-newsletter that looking back at previous bear market and investment cycles, investors could expect “rougher and more constrained gains ahead”.

Oliver stated that in Australia the average gain in the first 12 months from a bear market low during the post war period was 28 per cent — compared to the 60 per cent rise since March 2009 — and the average gain in year two was just 6 per cent.

“The slower gain in the second 12 months of equity market recoveries reflects the fact the initial bounce is usually from extremely undervalued levels as investor panic is unwound, whereas thereafter gains are dependent on earnings growth,” he said.

“Shares also start to become vulnerable to higher interest rates as central banks move to unwind the stimulus put in place through the economic downturn. This essentially reflects a shift in underlying economic and investment conditions from the 'sweet spot’ in the cycle (where leading indicators of growth are strong and accelerating, profits are being revised up but shares are cheap and inflation, interest rates and bond yields are low) to a tougher phase where growth momentum peaks but cost pressures, interest rates and bond yields start to rise.”

Oliver stated, however, that the broad growth trend in shares would remain up.

“We are still early in a typical bull market, earnings growth is likely to be strong and global interest rates are likely to remain low,” Oliver said.