It is now consensus that the authorities will do whatever they need to find a way out of the economic mess they have landed us in. The impact of central banks’ monetary easing so far according to our friends at CrossBorder Capital Ltd is now five times that during the Global Financial Crisis in 2008/9. The only bank not to play at the party has been the People’s Bank of China, whose domestic money printing is at a three-year low.
Asset markets have generally taken this as an on-steroids equivalent of the Greenspan ‘put’ (i.e. the implicit promise by the Federal Reserve in the 1980s and 1990s to loosen policy to avoid any kind of systemic market collapse). The US equity market is at an all-time high and bond yields remain at levels close to zero.
Not all asset classes have participated, and investors are still waiting to understand the fall-out in areas such as real estate, private credit, and even private equity. But they seem to have decided that listed equities, and in particular growth stocks, are the best substitute for the duration they cannot find at an acceptable price in the bond markets.
Investors are asking how sustainable valuations are. We note (again courtesy of CrossBorder Capital Ltd) that, the total market capitalisation of equity markets relative to the total supply of liquidity is near its five year average. We also note that investors’ risk appetite is below normal, albeit more negative for Europe and the U.K and less so for Asia, Emerging Markets, and the U.S.
The rate of QE peaked in May, at least for the time being, but the levels are still very elevated, and going forward the largest bank of all, PBoC, has the most scope to take action. We therefore surmise that we will continue to live in a world of plentiful liquidity for some time to come. Combined with the scale of monetary easing and investors’ still quite cautious risk appetite, we find it difficult to construct an argument for a major fallback in equities.
That is not to say they will make further progress: we see them settling at around current levels for the time being until there is more clarity on both the world’s economic prospects. We would expect a gentle shift in leadership away from growth, simply because the mega-tech stocks have been so dominant in the past six months. But we are not yet predicting a major turning-point towards value, which we think requires a sustained increase in bond yields and probably a change in inflation expectations.
CrossBorder Capital also make an interesting point that capital flows have been away from Asia and towards Europe in recent months. It is corroborated by the improvement in (for example) the U.K.’s trade balance since lock-down. Part of this is the effect of lockdown on trade, but it may also be the beginnings of companies’ efforts to shorten supply chains by ‘re-shoring’ or perhaps because the UK’s economy is more service-oriented, and therefore more able to continue in a society which does more of its activities virtually rather than with physical goods.
If you would like to see CrossBorder’s full article, please contact us at Linchpin.
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