The global head of equities at insurance broking and risk management giant Marsh says investors should prepare for an end to the four-year bull run as bond chaos and higher oil prices increase the likelihood of a correction.
The warning from Rich Dell comes as the S&P500 has pulled back 1.6 per cent in the past month while the local sharemarket has come off 4.4 per cent to hit a three-month low on Tuesday. Renewed fighting between Iran and the United States has sent the price of Brent crude above $US105 a barrel and Australian 10-year bond yields to the highest level since 2011.
And these higher energy prices have stoked inflation expectations, with the Federal Reserve widely expected to lift rates later this week.
Markets have also priced in an 84 per cent chance of a Reserve Bank of Australia interest rate hike to 4.6 per cent this month, which would be its fourth raise for the year, with a November increase fully factored in.
This in turn has put more pressure on bond yields. US 10-year government bond yields this week briefly topped 5 per cent for the first time in three years, while Australian 10-year bond yields climbed to a 15-year-high.
Other factors pushing up global bond yields include concerns over government debt piles and the rising corporate debt from hyperscalers such as Alphabet spending heavily on artificial intelligence. The Silicon Valley giant behind Google and Gemini is raising $5 billion from the Australian bond market, in what is likely the country’s biggest corporate debt transaction, amid a scramble for cash to finance a technology arms race.
Dell said the S&P500’s “phenomenal” earnings growth of about 50 per cent in the year to June, largely powered by the so-called Magnificent 7 that includes Alphabet, was the market’s main protection from a correction.
But given global markets have already risen by about 20 per cent over the past year, compared to between 7.5 per cent and 8 per cent as is typical, the combination of potentially unsustainable earnings growth, soaring bond yields and the higher oil price could finally trigger a correction.
“We’ve got the risks within equities coming from high valuations, questions about the sustainability of earnings, and bond yields rising, which creates further competition for capital. At some point, there is likely to be a correction,” he said. “Rising yields puts pressure on equities because it provides an alternative capital allocation, and it increases the cost of capital, so debt and equity become more expensive for companies.”
Marsh is a group of risk, reinsurance and capital, people, investments and management consulting businesses including what was previously Mercer Super. It has about $US16.2 trillion ($23 trillion) in assets under advisement.
However, BlackRock global chief investment strategist Wei Li on Tuesday returned to an overweight recommendation for emerging markets, arguing that South Korea and Taiwan would benefit from the semiconductor boom, and Brazil had strong exposure to the resources needed for the AI build out.
This marked a reversal from June, when the world’s largest asset manager cut its emerging market recommendation from overweight to neutral on fears South Korea’s tech-heavy sharemarket had run too hard.
Li said it all came down to whether earnings growth outweigh risks from rising borrowing costs, elevated oil prices and tensions in the Middle East, which flared again after Iranian-backed Houthis in Yemen attacked Saudi Arabia and made inroads into controlling Red Sea shipping routes.
“Oil has topped $US100 and long-term yields remain near multi-decade highs, yet stocks are near records. We think higher rates and strong equities can coexist,” Li said in a note to BlackRock clients on Tuesday.
In Australia, UBS equities strategist Richard Schellbach said that energy and utilities companies were the only ones out of the ASX’s 11 sectors that were helped by higher interest rates, while real estate and retail were worst hit.
Among the 100 largest companies on the ASX, Schellbach said residential property developers Stockland and Mirvac along with Wesfarmers, the conglomerate behind Officeworks, Bunnings and Kmart, would feel the biggest earnings pain as the RBA increased interest rates. Those woes would also extend to electronics giant JB Hi-Fi, and jobs platform Seek.
JB Hi-Fi’s share price is down more than 40 per cent in the past year and about 6 per cent in the past month, while Wesfarmers and Seek have both lost roughly 15 per cent. Stockland and Mirvac are flat over the past month.
“Right now inflation fears are dominating with a pattern formed whereby equities are selling off when bond yields move higher,” Schellbach said.
Jun Bei Liu, a portfolio manager at hedge fund Ten Cap, which has about $1.7 billion of assets under management, said she had already launched a short position, which involves betting a company’s share price will fall, against Stockland in a bid to profit.
“Australia needs more homes, but that doesn’t automatically mean higher profits for housing developers. Stockland is expecting fewer residential settlements and lower margins, while its borrowing costs are going up,” she said.
Source: https://www.afr.com/markets/equity-markets/investors-brace-for-correction-as-bond-chaos-ends-four-year-bull-run-20260915-p60xfx