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Magellan Financial Group Ltd (ASX:MFG) CEO warns shares could crash on this one risk

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is tipped to rise again today on a positive lead from Wall Street but don’t get too comfortable as global equity markets could slump into a bear market quicker than you might think, according to a leading fund manager.

High profile investor and the head of Magellan Financial Group Ltd (ASX: MFG), Hamish Douglass, told the Australian Financial Review that international shares could crumble by 30% and he has increased his cash weighting at the Magellan Global Fund to 18% to be safe.

That is the highest cash weighting for the fund in nearly a decade even though the bear market (which is characterised by a 20% or more drop from the peak) could be 12 to 18 months away.

But the timing could shorten dramatically if the US gets a second economic report showing a faster-than-expected pick-up in wage growth.

The first hot wage report triggered a market sell-off in January and a second one will likely spur the US Federal Reserve to quicken its interest rate tightening cycle.

While there are many macro factors impacting on stock markets around the world, rising interest rates are the biggest risk, according to Douglass.

Local investors should be on their toes. It doesn’t matter that the Reserve Bank of Australia (RBA) holds rates here at record lows. The rising cost of debt in the US and around the world will sink our market and there won’t be any place to hide from the rate storm.

Douglass is predicting the yield on the 10-year US government bond (called Treasuries) will break through 4% to trigger the meltdown and rising bond yields are already directly impacting on our banks like the Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC).

The rising US bond yield will also typically drag the US dollar higher, and that is not good news for commodity prices. This is turn could affect the share price performance of miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

However, this doesn’t feel like a time to be bearish when profit results from leading global companies are strong.

Earnings from NASDAQ-listed Alphabet Inc (the parent of Google) topped estimates, while European-listed investment bank UBS Group AG posted a better-than-expected result and car maker PSA Group also delivered a pleasant surprise.

Our reporting season is also about to kick-off next month and analysts are generally upbeat on the profit outlook for ASX-listed companies.

On the other hand, profit growth expectations alone probably can’t sustain the multiples on share markets given that earnings growth is likely to peak this calendar year in Australia and the US.

I believe the reason why investors have so far brushed aside this concern is because of the “least dirty shirt” theory. Simply put, there isn’t another asset class that looks more attractive than equities.

We can get away with this excuse for now, but I think the chickens could come home to roost at the end of this calendar year or early 2019.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Magellan Financial Group, Rio Tinto Ltd., and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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