Four years on, many remain skeptical of the equities bull. Opinions on the global economy and risk asset markets remain deeply divided. In the language of the 1920s poem “Fire and Ice” by Robert Frost, there are people who will still not participate in equities for fear of “ice” — debt deflation in the West. There remain possibly an equal number who fear “fire” — inflation from quantitative easing and cheap money.

Corrections, yes, there have been a few. Four major ones to be exact, using the MSCI All Country World Index as a proxy. On average, one every year. And there have been many regrets among bears who have witnessed, time and again, the bull rising “bloodied” from the dust to charge.

Despite the said global index having risen about 120 percent from its March 2009 low to its recent high in May, the uptrend in global equities is likely to continue over coming months.

There is neither fire nor ice on hand to end the equities bull.

Euro-area debt has, for now, been stabilized by the commitment of unlimited central bank support. US politicians were never going to send the country into deflation and financial crisis despite the haggling over the debt ceiling and government spending cuts. Life goes on and the equities risk premium goes down.

The US economy continues to grow but not as fast to warrant an end to cheap money. And rather than rising inflation — the feared “fire” — disinflation remains the dominant theme in the developed world.

Even in Asia ex-Japan, with some exceptions, the general theme has been moderating inflation. Meanwhile, Japan is attempting to emerge from the permafrost of deflation.

Even with tapering of quantitative easing, the US Federal Reserve’s policy rate will likely remain at zero until end 2014 or even longer.

In any event, rising Treasury yields are typically associated with equities gains in US cycles going back over 30 years. Much depends on the state of the economy.

Growth phase

Corporate earnings continue to grow, moderating the impact of price gains on valuations, which remain more typically mid-cycle than late-cycle.

As moderate global economic growth gains momentum next year, the uptrend in equities — which had hitherto been driven to a large extent by normalization of risk premiums and valuations — will move into its growth phase, relying more on earnings to move prices.

Meanwhile, bonds have moved into a mature phase. Even the gradual steepening of the US Treasury yield curve will have negative effects on both Asian sovereigns and corporate credits. Investors should become much more selective and generally reduce duration.

Commodities have been diverging from equities for more than a year, trading weaker while equities pushed higher. Equities are more anticipatory while commodities track global economic activity in “real time”. Commodity prices should pick up as economic growth strengthens later this year and next.

The US dollar should depreciate over the medium-term on the logic that the American economy needs a weaker currency to repair its current account balance.

But near-term, swings in US government bond yields can cause sharp moves in the dollar. Further, Asia ex-Japan currencies could face added pressure from a dramatically weaker Yen.

Polarized attitudes

Investor attitudes appear polarized between East and West. A major pre-occupation in the US market has been the timing of the Fed’s “tapering” of the size of quantitative easing. The underlying assumption: the recovery of the US economy will cause the Fed to start reducing the size of its US$85 billion monthly asset purchase program in the coming months.

But in the East, the MSCI Asia Pacific ex-Japan has been underperforming, almost in lock-step with weakness in the US Purchasing Managers Index. The implicit message here is the US economy is not strong enough.

So what is it? Is the bull market going to end in “fire” — overheated economies and rising inflation and interest rates? Or in “ice” — a renewed slump in economic activity and deflation?

Neither. The global economy is growing but at nowhere near the rates that would cause us fear of “fire”. Indeed, recent global production data suggested some loss of momentum over the past few months.

Stating the obvious — the Fed will eventually reduce the size of “quantitative easing”. But this is not imminent. The unemployment rate remains higher than what the target of 6.5 percent. And this is off a relentless slide in the labour force participation rate.

Meanwhile, the inflation rate is nearly half what the Fed reckons is its tolerance threshold. And while the impact of “sequestration” — programmed government spending cuts — continues to work its way through the US economy, the Fed will likely err on the side of caution.

Besides, “tapering” is not the end of quantitative easing. It means the Fed will reduce the amount of assets it buys depending on the strength of the economic data.

And eventually when it does exit QE, it does not necessarily mean government bond yields are going to surge. US government bond yields historically tend to be anchored by the Fed funds target rate. And the Fed policy rate could stay at zero long after the end of QE.

Self-sustaining

Further, it is not the eventual exit from QE but the manner of the exit from QE that is likely to determine the fate of the equities market. Stocks will weather the exit better if the US economy can self-sustain economic and corporate earnings growth by then.

Indeed, over the past 30 years, the bottoming and reversal of the 10-year US Treasury yield have been associated with significant gains on the S&P 500 rather than bear markets.

Indeed, if the 10-year US Treasury bond yield rises on a stronger economy while the Fed anchors the short end of the curve through a zero policy-rate, the resulting curve steepening could be positive for equities.

There has not been one equities bear market in the US in 40 years that was not preceded by a flattening and usually eventual inversion of the Treasury yield curve.

Meanwhile, the Bank of Japan has started quantitative easing on a grand scale, with a plan to double the monetary base in two years. This is an unprecedented monetary shock to the psychology of Japanese savers — pushing funds out of deposits into risk assets, including international assets.

Asia ex-Japan equities, which had been struggling under the burden of modest global economic expansion, could get a boost later in the second half of 2013 from a gradual improvement in growth around the world.

Chinese equities are going through a base building phase. They could trade in a broad sideways range over coming months pending clearer policy signals from the government and central bank.

This is a market that needs monetary stimulus and faster growth at a time when the government appears more concerned about longer-term structural reforms and preventing the build-up of a credit bubble.

Nevertheless, equities valuations in China — trading in both price to earnings and price to book terms are below global financial crisis lows. This suggests the downside is limited and a value trade for patient contrarians.

The article is edited for length. The opinions expressed are his own.