“Looking at the state of the world economy and financial markets, there is no denying that we are now in a late stage of the cycle, with all the associated signs of wear and tear,” says Lukas Daalder, chief investment officer at the Dutch asset manager.
“For one thing, the quality of the global credit market has steadily weakened. The overall creditworthiness is declining and covenant-lite financing is on the rise, while the number of so-called zombie companies − whose very survival depends on receiving even more credit − has steadily risen,” he adds.
Expensive equity markets are another sign the bull market is very mature but, as is repeated time and time again by asset managers, ‘bull markets don’t die of old age’.
The usual end to a cycle is triggered by a shock to the system. And it’s increasingly likely such a shock will come out of China, which is now large enough to significantly affect the global economy. As asset managers, especially those with business in Asia, are also very fond to stress: China has been responsible for roughly 30% of global growth over the past decade, almost twice as much as the US.
How long it will take until extra time is really over, depends in large part on China’s (in)ability to deal with its rising debt pile, believes Robeco.
“China’s private sector debt has risen to more than 220% of GDP,” says Daalder. “That’s almost twice the level of ten years ago.” And excessive debt is going to hamper growth at some point, making it ever more difficult for China to hit its sacred growth targets.
But China “holds the world record when it comes to ‘kicking the can down the road’,” as Daalder puts it. “And it may be capable of adding another year or two to its record, but it is clearly approaching an inflection point”.
Some still consider China’s authoritarian president XI Jinping a reformer, an image he tried to bolster with his well-timed Davos intervention earlier this year, when he championed global trade in response to Donald Trump’s protectionist rhetoric.
But, says Daalder, “nothing in Xi Jinping’s past suggests he is a reformer, so the IMF is probably right to adjust its growth projections for China upwards in the coming years, while at the same time highlighting the risk of an abrupt slowdown at some point in the future.”
The bull market is entering extra time, but it is not likely to end predictably, after two times 15 minutes. Instead, it may well end in a sudden death, thanks to a ‘golden (own) goal’ by Xi Jinping, the Chinese leader who has vowed to make China a global football superpower.