With stock markets being extremely volatile in recent weeks, it feels as though theres an ongoing battle between bullish and bearish investors. Each side is attempting to dominate the others viewpoint in terms of how the future will pan out for markets, with the two being completely opposite in how they view the prospects for the global economy.
At the time of writing, theres no clear winner and investor sentiment seems to be swaying wildly between the two different camps. Looking ahead, this situation seems likely to continue, but in the long run which side will win?
Follow the bear?
Clearly, bearish investors believe that the world is on the brink of another major recession. There are a few key reasons for this and ithas made many investors believe that were heading towards a perfect storm.
Firstly, the US is in a new era. Its no longer maintaining interest rates at rock bottom levels, but is rather in the process of a period of monetary policy tightening thatcould have a severely negative impact on global growth, according to bearish investors. They feel that consumption will be constrained due to the reduced availability of credit and businesses will see their profits hurt by higher debt interest costs.
Secondly, China is slowing down. It may be growing at around 7% per year, but according to bearish investors slowing growthis a tasteof things to come. They think that China has a weak financial system thatmay need recapitalising and that consumers will fail to pick up the slack from reduced capital expenditure, which has previously sustained high rates of economic growth. As a result, bearish investors believe that deflation will soon become a reality across the globe.
Thirdly, there are still concerns surrounding the Eurozone economy and the health of its banking system. Although the ECB recently sought to reassure investors about the capacity of European banks to withstand a prolonged downturn, bearish investors are still nervous regarding their prospects. And with the price of oil also hurting an important sector for a number of countries across the globe, its clear that bearish investors believe they have a lot to worry about.
Bulls in Chinas shop
Bullish investors, of course, dont deny that theres a great deal of uncertainty and the potential for economic challenges moving forward. However according to them, US economic data indicates that the worlds largest economy is performing well, while the pace of interest rate rises by the Federal Reserve is set to be extremely slow.
Similarly, Chinas soft landing has been reported for a number of years and while the country is enduring a slowdown, its in the midst of a transitional period thatcould lead to exceptionally high levels of growth in the long run. Furthermore, the Chinese consumer boom may only just be getting started and bullish investors may see some short-term pain, but a huge amount of long-term potential gain.
And while Europe continues to offer a slow rate of growth, the introduction of quantitative easing is likely to boost its growth profile. Meanwhile, bullish investors are also optimistic regarding the prospects for clean energy and the growth in demand for all forms of energy from a developing world over the coming years.
Time to buy?
Clearly, the two views are hugely divergent and in the short run it seems as though the stock market will switch between them depending on economic data and statements released by key players such as Janet Yellen.
However, in the long run, it seems likely that the current problems faced by the world arent insurmountable and are, rather, to be expected. For example, the US cantmaintain an ultra-loose monetary policy in perpetuity. Plus Chinas transition was never going to be a smooth one, Europe is also in the midst of a transition, andthe oil price is a result of supply and demand factors thatare likely to return to equilibrium in the long run.
As such, for investors who can take a long-term view and live with the ongoing volatile battle between bullish and bearish investors, now seems to be a great time to buy shares.