Comment from Peter Elston, CIO, Seneca Investment Managers:

“In our view, economies will succumb to what will eventually be tight monetary policy acting as a brake on activity. This will cause corporate profits to fall and perhaps more importantly, higher interest rates will make cash more attractive than risk assets such as equities and credit, where we think yields will continue to fall. The combination of both is what normally causes bear markets and the next one is unlikely to be an exception.

“Our analysis suggests that there will be a global economic downturn in 2020, the anticipation of which will trigger an equity bear market beginning in late 2019. This downturn we think will be the result of continued strength in the global economy for the next two years that will require central backs across the world to continue to tighten monetary policy.

“Yesterday we lowered our equity weights further for all funds, in line with the road map we laid out in early 2017. Specifically, we have reduced our UK equities targets, in view of sterling’s recent strength and the fact that the Bank of England is now we think firmly in tightening mode.

“As the expected equity bear market progresses through 2020 and perhaps into 2021, we will move our funds rapidly back to an overweight position in equities, ready for the start of the next bull market.

“Our prediction of a downturn is based on the simple extrapolation of trends in employment and inflation, and thus monetary policy. We will almost certainly be wrong with our timing but this is why we are acting now. If we are late, we will have already reduced equity exposure. If we are early, and the bull market continues into 2020, we can continue to reduce our equity targets even more. There are three certainties in life: death, taxes and bear markets.

“Our road map prompted us to reduce equities to a neutral position in relation to strategic asset allocation in the third quarter of last year, then gradually more underweight, by around 1% point every two months for our income oriented funds and 2% points for our growth fund. We will continue to reduce equity targets until late 2019, when our funds will be substantially underweight. This week we reduced targets further in line with our roadmap.

“As multi-asset managers, it is incumbent on us to try to mitigate the effects of economic and market downturns on our customers’ hard-earned savings, through the active application of tactical asset allocation.”