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Surging global wealth prolonging record equity bull run

LONDON (Reuters) - Have money, will invest. Coffers brimming from strongly growing economies and buoyant markets, the world’s wealthy are providing fuel to history’s longest ever equity bull run, lifting share markets to ever higher peaks.

The Wall St. Bull is seen in the financial district in New York, U.S., March 7, 2017. REUTERS/Brendan McDermid

The epic multi-year rally has sent world stocks to record highs more than 180 times so far in 2017, adding around $7 trillion to the value of MSCI's all-country index .MIWD00000PUS. But far from calling a top, money managers attending this week's Reuters Investment Outlook summit, predict even more in 2018.

Company earnings are growing at a double-digit clip, the investors argued, while central banks remain benevolent. And if share values are lofty, they are not yet seen as unreasonably so.

Undoubtedly true. But there is another potent catalyst as well -- rising wealth and a swelling “savings glut” as the global economy expands.

Global wealth rose almost $17 trillion in the past year to $280 trillion, Credit Suisse’s annual report said this week. Much of the new wealth is trickling into investment vehicles, from pension funds to sovereign wealth funds.

From the record-smashing $450 million price tag this week on a Leonardo da Vinci artwork to a dizzying rise in cryptocurrency values, wealthy investors, appear desperate for things to buy.

“There remains an extraordinary amount of money looking for things to do. (With clients), the conversation starts or rapidly gets to ‘we have more money than we have ideas’,” Luke Ellis, CEO of hedge fund Man Group, told the summit in London.

“Valuations are driven by more buyers than sellers.”

Equity funds worldwide saw total net assets rise by a fifth in the past year to over $20 trillion, according to Thomson Reuters fund research firm Lipper.

That may be helping to drive what Bank of America Merrill Lynch described as “capitulation into risk”.

The bank’s latest investor survey reported a record proportion of funds considered equities as overvalued even while overweight positions hit multi-year peaks.

“There is a lot more private wealth and saving that’s flowing into markets. GDP growth over 6 percent in the world’s second-largest economy (China) produces an enormous amount of wealth and that’s only one country,” said Mark Haefele, who oversees around $2 trillion in strategies at UBS Wealth Management.


But if demand is buoyant, supply of equity is not.

In fact net supply was close to zero this year and last year because of share buybacks and weak IPO activity, JPMorgan pointed out in a note. Funds meanwhile invested around $359 billion this year, after accounting for reinvestment of dividend income, it said.

“The increases in demand...have had a strong impact on the equity market because of close to zero net equity supply,” JPM told clients.

Haefele was among summit participants betting on equity gains in 2018. Equity sentiment among clients was not yet “euphoric”, he said.

Many dispute the rally is flows-driven, arguing the key draw is earnings growth at rates that are smashing expectations.

Luca Paolini, chief strategist at Pictet Asset Management, is in that camp. He says first that 16-17 percent annual equity returns are “absolutely average” in a bull market, and second, the gains are only slightly outpacing earnings growth which is running around 15 percent.

“The price-earnings expansion is just 3 percent. This is not a market driven by flows, otherwise PE would have gone up a lot more than 3 percent...this is a market driven by fundamentals,” Paolini told Reuters in a phone interview.

Arguably, one area of concern is technology, haunted by memories of the late-1990s collapse in sector shares after a period of exuberant valuations.

This year, U.S. tech shares have risen nearly 40 percent and firms such Facebook and Google trade at more than 30 times forward earnings .MIUS0IT00PUS. Broader U.S. stocks trade 18 times earnings, versus a 10-year average of 14.3, Thomson Reuters Datastream shows.

But the innovative, digitized nature of many modern firms means historical references may no longer apply, said Wayne Bowers, who helps oversee about $1 trillion at Northern Trust Asset Management.

“You can argue...the market does justify the high level of valuations,” Bowers told the summit.

BUMPY 2018

BAML called the early-November equity wobble a “dress rehearsal”, and indeed, some investors suggested 2018 could prove a “bumpy” one if central banks in the United States and Europe end up sucking more liquidity from markets than expected.

With the U.S. Federal Reserve seen raising rates twice and the European Central Bank planning to halve bond purchases, the “monetary component” in the equity rally will diminish, predicted Pascal Blanque, who oversees 1.4 trillion euros at Europe’s largest asset manager Amundi.

“From now, you can count less on this (monetary policy), meaning that earnings growth will prove even more critical,” Blanque said.

“Which for the moment is ok,” he added.

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Reporting by Sujata Rao Additional reporting by Helen Reid and Saikat Chatterjee Editing by Jeremy Gaunt