Eight plus years into the market recovery, we see valuations extended as most

Cover Story Eight plus years into the market recovery, we see valuations extended as most of the gains since 2014 have been driven by multiple expansion rather than earnings growth. In this issue of Global Foresight, we highlight potential investment opportunities, as well as challenges to sustaining this bull market. We examine emerging markets with Jimmy Chang focusing on China, and DAVID P. HARRIS, CFA Chief Investment Officer 212.549.5210 [email protected] The Charging Bull The lifespan of a bull market typically lasts many years, at times ending abruptly. Conversely, the statue now on Lower Broadway known as Charging Bull had a very short-lived initial run on Wall Street. It is not widely known that Charging Bull was never commissioned by the City of New York nor by any one of its major investment banks. Rather, the three-and-a-half-ton statue was simply unloaded one December day back in 1989 by a private citizen in front of the New York Stock Exchange. The benefactor was Italian sculptor Arturo di Modica who cre- ated Charging Bull to demonstrate his belief in the strength of the U.S. economy after the stock market crash in 1987. Hours after di Modica delivered his statue, it was removed by the NYPD and was not expected to be resurrected. This was not the end of this bull’s run, however, since its removal generated an amazing amount of media buzz—particularly noteworthy con- sidering this happened before the internet was available to the general public, so “going viral” was not even a concept. After a couple of weeks of public pressure, Charging Bull was retrieved and installed at its current home at the intersection of Broadway and Whitehall, where it has been a staple for tourists’ photos ever since. The current equity bull market may have more years left, but its age and valuation make the case worth revisiting. As we assess potential investment opportunities, we see valuations elevated in the U.S. market, while we believe Europe is likely to continue its cyclical rebound. We are also encouraged by political devel- opments on the continent. We believe there are a number of attractive emerging market (EM) opportunities, but are mind- ful of the challenges most of these once-rapidly-growing econ- omies face. Frankly, it is not just the bull market that is aging; it is most of the world, which has important sociological, eco- nomic and investment implications as demographics and debt are likely to constrain long-term global economic growth. The Challenge of High Valuations In 1998, professors Robert Shiller and John Campbell con- ceived the cyclically adjusted price-earnings (CAPE) ratio, which averages earnings over a 10-year period to minimize the impact of economic cycles when valuing equity markets. The CAPE ratio has been widely cited as evidence of U.S. stock mar- ket overvaluation. The present U.S. equity CAPE ratio is the GLOBAL FORESIGHT THIRD QUAPTER 2017 article by Dr. Mariela Vargova. Michael Seo on South Korea. We also comment on corporate governance in an highest it has been except during two famous market peaks— 1929 and 1999. We believe the CAPE ratio is cause for concern, but not alarm. It most likely suggests that U.S. equities will have subdued future returns. However, unlike the market’s prior peaks at the end of the Roaring Twenties or the dot-com era, we do not believe we are in the midst of an economic or market bubble. If there is a benefit to the subdued economic recovery we have recently experienced in the U.S. where GDP growth has been averaging about 2.0%, it is that the economy has not built up the excesses that it did during past peaks in the CAPE ratio. By contrast, during the 1920s, U.S. real GDP growth aver- aged 4.2%, and from 1996-1999 it grew at least 4.3% in each calendar year. Since the CAPE ratios in those periods calcu- lated off a base of very strong economic activity and earnings, those periods were more susceptible to crashing than today’s more muted environment. co Ye Cy 904 de BAH, HUMBUG! N.Y. sak Exchange exinchel can’t bear Christmas-gift, | SATURDAY, DECEMBER 16, 1989 / 4 Cleicy ord windy. mid 25, dey; lor. ow tor, onghh J Dota, Page? A theae-ton bronze bul left the american lee tral jar i svay yesterday Re cad LAST GUANE TO WIN A B 310,000 HOME IN POCONOS UP FOR GRABS TODAY: Pages 2, 328 42 Ec mace ear Source: New York Post HOUSE_OVERSIGHT_012080