There could be another big risk on the horizon that could hurt the (ASX) share market.
Global investment bank Morgan Stanley has warned that the world could be close to the reaching the peak point of growth and this could lead to market instability.
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Why would peak growth be a bad thing?
Morgan Stanley's wealth management chief investment officer (CIO) Lisa Shalett pointed out that positive economic news still points to an improving job market and higher corporate profits.
Ms Shalett also noted that investors are now worrying that economic growth is faster than expected which could mean that the United States' Federal Reserve decides to lessen its support for the economy earlier than expected.
But a key market risk that is "looming" is the problem that year on year growth rates will be hard to beat again for both the economy and company profit growth. When it seems that the growth rate is slowing, combined with smaller US Federal Reserve stimulus, there could be a hit to the (ASX) share market sentiment.
GDP
One example that Ms Shalett gave was in relation to GDP.
Morgan Stanley is expecting 2021 first quarter US GDP to increase by 8% to 10% – much stronger than a normal year. The second quarter of 2021 could be even better when compared to the COVID-19-affected months of March, April and May in 2020. Plus, the new stimulus will be flowing around the economy. Morgan Stanley thinks that 2021 GDP growth could be around 10%.
But in 2022, growth could slow right down to less than 3% and businesses will also be cycling against strong comparative periods in 2021.
Earnings
Ms Shalett pointed to the fact that Morgan Stanley's chief investment officer and chief US equity strategist is expecting S&P 500 profits to be up 27% year on year in 2021 – this is apparently seven percentage points stronger than historic peaks.
An increase in capital, wages and materials expenses, as well as a higher tax rate, could hurt profit and mean profit growth is slower in 2022.
Government stimulus
Morgan Stanley is expecting the government to reduce its economic stimulus in 2022, such as a reduced level of bond buying.
Ms Shalett wrote that in 2013 a similar tapering move resulted in interest rates increasing and shares being sold down. Morgan Stanley is also expecting government payments to the unemployed, households, small businesses and states to stop in 2022.
What's the answer to this with the (ASX) share market?
In conclusion, Ms Shalett advised:
These transitions, which we see arriving as the US economy continues to improve, could cause U.S. equity prices to move sideways, as investors adjust to a slower rate of growth than they had experienced the year before. Keeping a diversified portfolio that avoids big bets on one style, sector or region, may be the best defence when positive rates of change start to slow.
