Brace yourself for a US-led correction, says global equities expert

Ariel Investments global equities chief Rupal Bhansali has a bleak view of the world’s sharemarkets – and says the fallout of a correction could last a decade.

Shares on the Australian Securities Exchange are in for a bumpy ride. Picture: Damian Shaw

Sharemarkets are in for a lost decade as central banks tighten monetary policy to halt rising inflation, according to Rupal Bhansali, chief investment officer for global equities at Ariel Investments.

Ms Bhansali said she expected the US Federal Reserve to induce a recession as it continued to tighten monetary policy in a bid to fight inflation – a negative for countries like Australia.

She said tightening monetary policy would see the US market in particular end the decade lower, with highly leveraged, loss-making companies suffering the most.

“The US stockmarket is extremely exposed from a valuation perspective,” Ms Bhansali said in an interview during a visit to Australia this week.

“There will be a correction in the markets over the next decade.

“We have a regime change under way. We are going from a regime of quantitative easing to quantitative tightening. The Fed is likely to induce a recession.”

This was confirmed in comments made by Fed chairman Jerome Powell at the Jackson Hole conference in Wyoming, where he warned the central bank was prepared to further tighten monetary policy to fight inflation, Ms Bhansali added.

She said Ariel, which has some $11bn invested in shares, was avoiding the Australian market.

She said local companies exposed to commodities would be hit by a global recession, while financial services companies could be affected when the Australian property markets corrected.

“We have been very circumspect about the Australian market,” she said. “In a recession, commodities tend to do poorly.”

Ms Bhansali said Australia had also suffered from asset price inflation, with real estate markets in particular “on a tear”. “A correction on that front can hurt the financial sector as banks tend to lend against property,” she said.

Rupal Bhansali expects the US Federal Reserve to induce a recession.

Ms Bhansali said risk taking had been rewarded in global markets over the last decade, but it would be penalised over the next 10 years.

Below investment grade bonds and shares would be hit the hardest as the US market corrected.

Last year was a speculative bull market where “risk taking was rampant”, she said. “It is the kind of environment where risk-taking was rewarded. But now we have this regime change, a lot of that speculative excess is going to unwind, which is what we saw in the early part of 2022.”

Ms Bhansali said the US stockmarket was at the beginning of a multi-year process of correction.

“We are calling it a ‘lost decade’, where equity markets, particularly the S&P 500, are likely to end lower at the end of the decade than they started out,” she added.

Ms Bhansali said Mr Powell’s comments last weekend showed that the Fed was now focusing on “helping Main Street, not helping Wall Street”. “In the last decade, we didn’t have much of an inflation problem,” Ms Bhansali said.

“The Fed could afford to be accommodative. Going forward, that’s going to be near impossible given how much stimulus was put to work and the excess it has created. The unwinding of the balance sheet … is going to be very difficult for stockmarkets and credit markets to digest.”

Ms Bhansali said investors should look for companies that were paying strong but sustainable dividends.

While share prices may go down, she said investors could still make money from companies paying strong dividends.

She said companies with high debt levels and those that were valued well above their intrinsic worth would be vulnerable in an era of tightening monetary ­policy.

While this applied to equity markets around the world, she said the US market was the most vulnerable as it was “the most crowded trade in the world”.

She said the US market was headed for a decade-long correction, with parallels to the 20 lost years in the Japanese sharemarket. She predicted that both the US sharemarket and the US dollar faced a correction, providing a “double whammy” for foreign investors, including those from Australia.

Ms Bhansali said there were opportunities in Europe and Latin America where companies were “out of favour and undervalued”.