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How long will this bull market last?

Why you should care about what’s happening around the world

Let's take a look at how geopolitical risk in Europe and the Middle East can affect us here in Australia, and whether the long bull market in shares is going to continue.

Why investors should keep an eye on Europe

It’s been nearly six years since the peak of the Eurozone debt crisis, and by and large European economies have come a long way. Unemployment across the continent has fallen to just over 7%, from a peak of 11% back in 2012, and the share market is up around 63%.

The recent Italian election gave us a reminder recently that underneath the surface, things are still a bit fragile.

Italy was one of the countries at the epicentre of the Euro crisis. Along with Portugal, Ireland, Greece and Spain, the Italians saw their government bond yields soar as investors began to fear that they might default on their debt. At the time, the very existence of the Euro was called into question.

Since then growth in Europe has recovered, but it’s been uneven, and Italy is one country that has been left behind.

The election in March was inconclusive, and eventually resulted in a coalition government of strange bedfellows from the far left and far right. We saw a sharp increase in volatility across global markets as for a few days there, the incoming government might favour leaving the Euro.

That would be a pretty big deal. A ‘Quitaly’ to go along with ‘Brexit’.

Have oil prices peaked?

Global economic growth has been pretty strong over the last few years and we’ve seen the impact of this in higher commodity prices. The oil price for example has risen from around US$26 a barrel back in February 2016, to a peak of US$72 in May this year.

The most obvious place this impacts on Australian consumers is in petrol prices, which are up nearly 50% over this period.

The good news is that most forecasters expect that oil prices have peaked.

The good news is that most forecasters expect that further rises in the oil price will be limited from here, as there’s significant capacity for new supply to come on stream when prices are above US$40 per barrel.

On the other hand, oil prices do tend to go up when geopolitical risk increases, and tensions in the Middle East are on the rise again following the US withdrawal from the nuclear deal with Iran.

Are we at the end of the bull run?

Since global share markets took off in 2011 we’ve had seven years of strong growth, nearly 14% per annum in Australian dollar terms.

Valuations in some markets are looking a bit stretched, and while this isn’t necessarily cause for alarm, it’s probably unlikely that the next seven years will be as good.

There’s an adage that bull markets don’t die of old age, and while the fundamental drivers of growth remain strong, we see no reason why this one can’t go on a bit longer.

We’ve had seven years of strong growth… and it’s probably unlikely that the next seven years will be as good.

Geopolitical risk is always with us, and sometimes markets pay more attention to it than others. Another crisis in Europe, an inflation shock, a trade war or real war somewhere are all plausible triggers for a market selloff.

For a long-term investor these corrections can represent opportunities, provided you hold a diversified portfolio and are able to stay the course.

For a long-term investor these corrections can represent opportunities, provided you hold a diversified portfolio and are able to stay the course.

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