I remember you mentioned several times that commodity shares outperform when we are in the latter stages of a bull market. Do you think we are approaching the end of this bull market, and if so would you be willing to share us your time frame?

Tks in advance for your help, and all the best to you.

David Fuller's view

Thanks for your important question of general interest to subscribers.

I wish this was an easy question to answer but we are living in circumstances which no one in the markets today has previously experienced, in terms of monetary policy.  In our era starting with the post WWII period, most global bull markets have eventually been assassinated by central banks as they tightened monetary policies in efforts to curb excessive speculation, overheating economies and rising inflationary pressures.

Needless to say, this is not the situation today.  Instead, stock markets were floated higher by accommodative central banks, commencing in late 2008.  However, many of them have not done much since their 2011 highs, due to weak GDP growth, including recessions.  This chart of the MSCI World ex US Index (MXWDU), puts underperformance in perspective.  This is calculated in USD and has a P/E of 17.87 and yields 3.25%, so it is not too expensive.  The Dollar Index has been a headwind but mainly since mid-2014 and it is currently off its highs.   

So I would say we have an overall ranging pattern for the MSCI World ex US Index above, and it is currently rallying from the lower side of its range since 2010.  The importance of the USA can be seen in the MSCI World Index (MXWD), which includes Wall Street.  It fell sharply from its 2015 high but has recovered slightly more than half that decline since mid-February.  With the US market’s inclusion it is somewhat more expensive with a P/E of 18.67 and yield of 2.65%.  My guess is that MSCI World will probably extend its range between a little bellow 450 and slightly above 350 over the lengthy medium term.

However, the US economy is the key.  Most analysts are upbeat about its prospects, but mainly because it looks a little better than everything else.  The employment situation has improved considerably in recent years but the majority of jobs are in lower salary brackets.  Meanwhile the financial sector is reducing employment.

Following three consecutive quarters of declining earnings, many US companies are cutting back on payrolls.  Investment in corporate expansion programmes has declined.  Earnings continue to be flattered by share buybacks.  The main item of good news for US multinational companies is the Dollar’s recent retreat from this year’s highs.  That should help corporate profits somewhat but if the US economy were to slip into recession for any reason, including weak global GDP growth, Wall Street could fall back sharply from its highs.  Moreover, seasonal factors become less favourable for the next six months, commencing in May.