Why the bull market still has legs

Asset prices look set to continue to defy the odds this year, fuelled by the lowest cost debt in a generation.

“Gravity always wins.”

Thom Yorke and Radiohead were singing about plastic surgery, but financial market observers reasonably expect bull markets to be subject to the same fate.

Historically, the average bull market is seven to 10 years. Current property and world stock market valuations are beating the odds, but many argue they are on borrowed time.

Commodity markets have had their comeuppance in recent weeks, with iron ore, oil, and now copper all hitting the skids. But even with the S&P/ASX 200 in its fifth straight day of losses, local share price forecasts are persistently upbeat.

A poll of 10 market strategists and analysts found expectations for the index at year end ranged from at least 5460 all the way to 6130 points.

The US stock market bull run could go on another five years in the “longest expansion ever”, says Morgan Stanley strategist Adam Parker, telling Bloomberg TV “the cycle doesn’t just die of old age”.

Back home, Fitch is forecasting 4 per cent growth in Australian residential property prices this year, third after South Africa and Brazil, despite already being among the most expensive markets in the world on all metrics measured.

In what has been described as the “unhappiest” of bull cycles, asset prices have been perversely running on reverse dynamics, with US stocks often moving at odds to economic data to benchmark against bond yields. So assets have been running on bad news as equity market valuations are supported by reductions in interest rates.

While that becomes hard to sustain as bond yields are already very low, the bulls argue the run will continue until one of two things forces it to unravel: either very strong economic growth and inflation that will force up higher official interest rates, or a recession that will see unemployment rise and credit availability dry up. That would see spreads widen as lenders introduce a risk premium and don’t lend as widely.

With petrol prices dropping, inflation is nowhere in sight, so it is a rise in unemployment that is currently most under scrutiny as a possible scenario under which the current favourable credit climate might give way.

For now, the cost of capital arguably justifies US stockmarket PE multiples, which are not that “outlandish” versus bond yields, says Credit Suisse strategist Damien Boey, who adds that an expectation of Fed rate rises is stopping the US market becoming really frothy.

A new Credit Suisse report predicts asset prices will continue to appreciate in 2015 as central banks respond to the deflation threat. It forecasts the S&P/ASX 200 index will rise around 700 points to 6,000 by the end of the year for a total return of around 15 per cent, fuelled by the lowest cost of debt in a generation.

And house prices? Bendigo Bank chief executive Mike Hirst told Business Spectator he was unconcerned about Australian property market, that prices aren’t “out of whack”, arrears were fine and impairments low in an environment of low interest rates.

And he can’t be accused of not putting his money where his mouth is. After searching for seven years, Hirst just bought a property in Melbourne’s bayside Albert Park, where the value of units shot up by a third in the past year.

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