Sharemarkets set for biggest tumble since GFC

Veteran fund manager Han K. Lee says inflation is about to bite, leaving global sharemarkets set for the biggest tumble since the global financial crisis.

Prime Value Asset Management, the firm Lee co-founded with chief -executive Y. Yong Quek in 1998, is again encouraging shareholders to think about keeping more cash on the sidelines.

America has over-borrowed and overspent, while China has over-borrowed and over-invested, Lee says.

“Neither strategy is viable in the long term, so something has got to give.”

Lee’s investment team is looking for new ways to skew their Australian equities mandate towards companies with earnings underpinned by real assets, such as infrastructure projects and gold.

Lee and Quek won the loyalty of many of their current clients by advising them against piling more money into shares ahead of the start of the global financial crisis in 2007.

“We were a bit early in making that call, but the exact timing of a market correction is impossible to predict, and when a crisis hits, it happens faster than you have time to respond to,” Lee says.

Australian shares will increase but, for the most part, the bull run is over and the inflationary risks are inevitable, he says.

It is the long-term effects of the unprecedented experiment in global monetary stimulus, led by the United States Federal Reserve, over the past six years that has Lee worried.

“About a year ago, it was weird that bad economic news was being interpreted as good news by the market, because it was seen as a sign that stimulus would be ongoing,” Lee says.

“Now the situation is even more perverse. It doesn’t matter whether the latest data is good or bad, brokers are finding a rationale to interpret everything as an excuse for why shares should continue to rise.”

Eventually, bad news will again be rationally greeted as bad, and when that does happen, the market could fall sharply, Lee says.

Investors need to prepare for high rates of inflation over the coming years, he cautions.

“After unprecedented stimulus, inflation will overshoot before things normalise again.”

Current global central bank policy is being based on Keynesian economic theory developed in the 1930s, when economies were more contained, he says.

“Today, in a globalised world, the knock-on effects across markets and asset classes are more complex.”

“America is running on zero real rates with lenders subsidising borrowers. It’s the mother of all carry trades.”

Lee is far from alone in having a cautious outlook for the market.  A raft of analysts and fund managers have noted that the average price to earnings ratio of the ASX is now above its long term historical average. 

“We haven’t had a correction in almost two years now,” Watermark Funds Management chief investment officer Justin Braitling told The Australian Financial Review on Monday. “That is unheard of, to have a market advance without some sort of a correction for such a long period of time.”

In June columnist Ambrose Evans-Pritchard wrote in London's The Telegraph that the world's central bankers were also becoming more cautious, citing a note from Simon Derrick at the Bank of New York Mellon.

"The Bank of England's Deputy Governor Charles Bean says the lack of volatility is 'eerily reminiscent' of the run up to the financial crisis in 2007-2008," Evans -Pritchard wrote, noting that Bean's peers inlcuding the Italina Central Bank's Ignazio Visco and Dallas Fed chief Richard Fisher were warning that the current lack of volatility in markets was encouraging investors to take on more and more risky investments.