Why the stock market is about to crash, according to experts

Experts warn that the stock market market is in for a crash.

Experts warn that the stock market is going to crash next year.

Legal and General Investment Market (LGIM) says that there will be a 30% correction in 2018 thanks to the end of the central banks' quantative easing programmes.

LGIM chief investment officer Anton Esher said that the supply of Government bonds would switch from a net $300 billion (£223bn) taken out of the market to net supply of $500 million (£372m).

He also argues that the reduction in credit in China will also have an impact.

"As we are looking into 2018, (in) this low volatility, high asset price environment, there is a potential trigger for volatility.

"Timing it is very difficult but sometime next year there will be a pick-up in volatility and it will lead to a repricing of the risk premium," he said.

Eser points out that the scale of correction is difficult to predict but that price-earnings ratios on US equities were at least 20%-30% dearer than historic norms so a correction of the same degree should be expected:

"When you go through any type of repricing you always overshoot on the downside," he said. "It could be well in excess of 30%."

The bubble that will “inevitably” burst

Meanwhile, star fund manager Neil Woodford has warned that we are heading for a stock market crash because we are in the centre of a bubble that will “inevitably” burst.

In an interview with the Financial Times, Woodford has said the current bubble has “echoes of the tech bubble” and “so many lights flashing red that I am losing count”.

Growth stocks are surging

One sign of a bubble is the growing gap between the performance of value stocks and growth stocks.

Before the tech bubble burst almost 20 years ago shares in a significant number of high-growth tech companies surged, then the market collapsed when investors realised these companies could never make the profits needed to justify their huge valuations.

Once again growth stocks are surging ahead while value stocks underperform, according to Woodford.

“The difference is greater than at any stage in stock market history,” he told the Financial Times.

“That tells you all you need to know about current market conditions across the globe.”

Woodford's woes

History is also repeating itself for Woodford. Before the dotcom crash he experienced woeful performance as he invested in stocks he believed would rise when the tech stocks fell.

Woodford “probably came within about six months of losing his job,” Mark Dampier of investment firm Hargreaves Lansdown told the Telegraph.

Eventually, his gamble paid off and his investments in sectors such as tobacco rose when the dotcom bubble burst.

At the moment Woodford is going through a rough time with several of his large holdings failing to perform. His income fund is down 8% over the past six months and has gained only 1% in the last two years. In contrast, the FTSE 100 is up 25% over two years.

It has meant a number of investment firms have pulled their money out of Woodford Equity Income. However, Woodford himself believes he has made wise moves by investing in unpopular sectors.

He is one of the few fund managers to say he believes Brexit is a buying opportunity and he has been steadily investing in UK banks, retailers and housebuilders, arguing that fears of a Brexit-induced economic Armageddon are discounting these sectors.

“A consistent feature of bubbles is that there is always a subset of the market that falls out of favour as investors clamour for the fashionable stocks of the day, providing fuel to power the bubble before it bursts,” he says.

Are you taking too much risk?

Woodford also warns that another problem that is inflating the bubble is that investors have forgotten that the stock market can be a risky place.

“Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations.”

He goes on to cite Bitcoin being worth more than $10,000 (it's currently valued at $17,000 at the time of writing) as a sign that we are in bubble territory.

Stock markets have convinced investors that “making money is easy”, which is leading us into dangerous territory.

Woodford believes the bubble we are currently in is bigger than the dot-com boom or the period before the recession in the 1990s.

He is “utterly convinced” that his view is the right one, and this bubble will eventually burst.

But for now his CF Woodford Equity Income fund is down 1.4% over the year, making it one of the worst performers in its sector.

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