Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 224

Three reasons the bull keeps running

Only a few days apart, I attended presentations from two global equity managers offering divergent perspectives. Both were realistically open to all possibilities and know about the market’s current optimism, but where Hexavest saw a bubble, Insight Investment Management justified the valuations. Both these fund managers do not market to retail investors and their views are normally restricted to institutional and wholesale investors.

It’s worth knowing that both managers are top-down, starting at macro conditions rather than bottom-up stock pickers. They forecast growth, currencies, financial conditions and prices before looking at which companies to invest in.

In its active asset allocation process, Insight makes frequent adjustments based on expected returns and risk. Its current listed equity allocation (excluding infrastructure) at around 38% is the highest for a couple of years, and cash holdings are at the bottom end of the range since 2009. However, most risk is carried in ‘total return strategies’ which are less prone to overall market directional influences and derive returns from relative value or absolute returns. For example, backing its general optimism, Insight states:

“Our pro-cyclical portfolio stance – based on the idea that a synchronised global recovery would continue – looks well supported. Purchasing managers’ indices (PMIs) from around the globe are at high levels and moving higher.”

1. Better financial conditions and growth

Insight quotes many indices which show an improvement in global growth and lead indicators, with better global growth since the start of 2017 after slowing into 2016.

For example, the Institute of Supply Management (ISM) manufacturing index monitors employment, production, new orders and supplier activity based on over 300 major firms. The ISM Index has been rising since early 2016, and in the last few months has had a healthy uptick. Insight reported in early October:

“In the US, economic data continued to be strong. The ISM manufacturing index reached 60.8 in September, the highest since 2004. US service sector growth also reached its highest in 12 years in September. The US trade deficit dropped to an 11-month low and factory orders rebounded in August. Markets are expecting a non-farm payrolls figure around 90,000 today. The House of Representatives approved a $4.1trn budget, with markets optimistic that this could be a step towards tax reform.”

2. Inflation and unemployment under control

The US remains the most important economy for economic growth, and despite record low interest rates and low unemployment, core inflation does not seem to be rising. Wages growth remains subdued. The economic theory behind the so-called Phillips Curve, that low unemployment leads to high inflation and wages growth and vice versa, is not occurring.

Phillips Curve is flat in the US

In Germany, engine room of the European Union, unemployment is at its lowest for decades but there is also little sign of inflation.

3. Improving corporate profitability

A rise in share prices might be driven by a re-rating, or earnings expansion, where investors are willing to pay higher prices for the same earnings. Low interest rates reduce the attractiveness of alternative assets such as bonds and encourage buying of equities if earnings do not expand. The other driver is increasing earnings contributions, and after flat conditions through 2015, there was an improvement in 2016 and into 2017, as shown below. Says Insight:

“After more than two years of contraction, global corporate earnings growth turned positive at the start of this year and the 15.8% year-on-year rise in August 2017 marked the highest reading since 2001.”

Conclusions

This combination of improving growth, low unemployment and corporate earnings growth leads Insight Investment Management to believe there is reason for optimism about the near-term performance of equities. The portfolio managers have shown a willingness to rapidly change portfolios from month to month, but at the moment, they are solving the equity conundrum with confidence in the market.

 

Graham Hand is Managing Editor of Cuffelinks. Insight Investment Management has AUD930 billion in assets under management with AUD33 billion for wholesale Australian clients (although its funds are found on many local wraps). It is part of the BNY Mellon group. This material is not investment advice and it does not consider the circumstances of any investor. It is based on material considered to be reliable but no assurances are given.

Bull or Bear? What is your opinion on the medium term outlook for markets? After reading this article as well as Graham’s other piece Five warnings about the most hated bull market in history, we invite you to voice your opinion in this short survey [survey now closed].

 

RELATED ARTICLES

Five warnings about the most hated bull market in history

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628 with weekend update

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.