The FTSE 100 has experienced a bull market that has lasted for almost 10 years. This makes it one of the longest bull markets in recent decades, and suggests that a bear market may not be far away. After all, the index has never risen in perpetuity, and this time will be no different.
The challenge facing investors, though, is deciding when it is time to become more risk-averse. Furthermore, contemplating which assets to buy could also be a difficult decision – especially when the outlook for the world economy continues to be relatively positive.
Of course, it could be argued that a great stock market crash is not imminent. The world economy is growing at around 4% per annum at the present time, with the US and China delivering stronger growth than many investors were anticipating. Even with the risks surrounding Brexit being taken into account, the UK is due to grow by 1.5% in 2018, while the Eurozone’s growth rate is due to be over 2% next year.
None of these figures suggest that a recession or a bear market are around the corner. Then again, many bear markets have proved to be obvious only after the event. For example, looking back on the dotcom crash makes many people wonder how investors were willing to pay such high valuations for what were essentially ideas of businesses which in many cases had no profit, and even no revenue. At the time, though, the internet was seen as a revolution, with businesses that could capitalise on its growth potential having the capacity to generate exceptional earnings.
Looking ahead, the risk of a full-scale trade war is clear. Tariffs have already been put in place by the US and China, as well as a number of other countries. Therefore, if a bear market results from this, investors may look back in years to come and state that it was rather obvious.
While it is difficult to predict when a stock market crash will occur, one potential solution could be to focus on company valuations. At the present time, a number of cyclical shares are highly-valued, with investors having a positive outlook on the world economy. In contrast, many defensive shares appear to have wide margins of safety at the present time. This suggests that there could be an opportunity to take profit on cyclicals and switch into defensives that are offering the potential for reduced downside risk over the medium term.
Of course, some investors may wish to move out of shares altogether. But with interest rates set to rise, bonds and property may lack relative appeal. Therefore, shares which offer strong balance sheets, resilient earnings and low valuations could prove to be the best long-term opportunity at the present time. Clearly, predicting when a bear market will occur is challenging, and timing the market may not always be possible. But by focusing on company fundamentals, it may be possible to outperform the FTSE 100 over the long run.