There seems to be confusion as to where equity markets are headed next. I could easily be wrong, but it seems that this bull market will continue carrying on. Private equity funds have been taking companies off the exchanges, creating an imbalance of supply and demand for stocks, while creating a reflexive relationship along with this imbalance: as companies are taken private, more and more market participants bid up potential buyout candidates in hopes that their stock receives a bad. Fueled by relatively low interest rates globally, the PE guys are acting rationally, not withstanding quick rate hikes by central banks in the near future. Valuations on a relative basis aren't obscene, yet, either, nor are relative valuations extremely cheap.
Even though the US domestic economy looks like it is slowing down, many larger mega-cap companies can now be thought of as truly global organizations who happen to be head quartered in the United States, and fundamentals in global markets remain strong. At the same time, economists see the Federal Reserve lowering rates in the Fall to ease possible job market woes. An easing of US interest rates will only serve to support this bull market.
But all good things must eventually come to an end. The BRIC countries are still on fire, especially China (NYSEARCA:FXI), and I still wonder how things will play out when the business cycle eventually ends in these countries. While the BRIC nations have done well so far and are taking advantage of their potential, obstacles still remain with their political environment, which on aggregate is far from open and democratic. A proper political system that allows for the free exchange of ideas and protects property rights is essential for these nations long-term well being and wealth creation. People sometimes forget this as they get caught up in the BRIC excitement. What will be the sign of a top? I don't think equities will become overvalued until more retail investors start jumping in, something that I believe is starting to slowly happen. Stock market coverage on the front page of non-business magazines and stock market headlines on major newspapers will also signal that the top is near. My instincts tell me that we have another 2-3 years before things start to get ugly, but only time will tell.
I believe the best way to position yourself in this market is to keep it simple and focus on intrinsic value first. Look to put yourself on the other side of the trade as leverage unwinds. Own low yielding assets such as the Swiss Franc (NYSEARCA:FXF) and Japanese Yen (NYSEARCA:FXY), or related interest rate products and scale into this trade as the facts continue to support this strategy. With so much leverage out there, markets will move as these positions get closed out sooner or later. Also look for off beat ideas in other potentially fast growing companies, especially the N-11 (next 11 nations as outlined in a 2005 Goldman Sachs economic paper) countries which encompass South Korea, Mexico, Pakistan, Bangladesh, Vietnam, Indonesia, Turkey, Nigeria, the Phillipines, Iran (yes, Iran), and Egypt.
Other major themes to watch for include water infrastructure (Suez (NYSE:SZE) and Veolia Environment (NYSE:VE) are my favorite plays here) as well as alternative energy (which seems tricky right now, and could be the next internet type bubble with any luck). As always remember that markets don't move because they want to, markets move because they have to.