Developed market equities, as measured by the MSCI World Index in terms of US dollars, are down by more than 6 percent - off its high in February, while emerging market equities as measured by the MSCI Emerging Market Index are down by more than 7 percent.
Central bankers in developed economies are probably on the back foot again. The potential fallout of upcoming normalisation of monetary policy in the eurozone and higher inflation in the US is amplified by global trade tensions and volatile stock markets, which is already taking its toll.
The behaviour of European and Japanese bonds over the past two months is perhaps an indication that the central banks, and especially the European Central Bank, are adding liquidity to the markets by accelerating their bond-buying programme again - yes, resuming quantitative easing again.
The global economic situation has abruptly moved into average growth from above potential real gross domestic product (GDP) growth. The closely monitored JP Morgan Global Manufacturing and Services PMI, compiled by HIS Markit based on the results of purchasing manager surveys covering more than 40 countries, indicate that global economic growth fell to a 16-month low in March.
However, global business confidence as measured by the G7 Business Confidence Index is still near the recent 10-year high. In the absence of a major crisis, and given the stage of the global economic cycle, global business confidence is likely to remain elevated for some time, but more importantly unlikely to rise substantially from the current levels.
As global market valuations are driven by business confidence, it is evident that the prospect of a further re-rating of the global stock market is limited.
The most recent highs in February may well be tested and even surpassed, but the climb after that will be difficult and characterised by occasional bouts of volatility.
If global business confidence falters as a result of Gray Rhino’s such as tighter monetary policies, inflation fears and global trade tensions rest assured that global equity markets will not survive unscathed.
A Gray Rhino is a highly probable, high-impact yet neglected threat, which, when it charges can cause severe damage.
Furthermore, US President Donald Trump has already shown that he is a Black Elephant - a combination between the Black Swan and the proverbial elephant in the room, which does something no one predicts.
It, therefore, means that despite calmer waters the markets are extremely vulnerable to any threats. Locally, economic growth has started to gain further traction as business confidence improved.
The South African bourse, however, indicates that GDP growth has slowed to less than 2 percent quarter-on-quarter annualised.
The FTSE/JSE Financial and Industrial Index’s valuation is in line with developed markets, while the FTSE/JSE All Share Index’s valuation compared to developed market equities is still at the lowest level since August 2005, Steinhoff’s effect excluded.
Lower volatility will make the investment ride more comfortable for the moment.
Ryk de Klerk is an independent analyst.
The views expressed here are not necessarily those of Independent Media.
- BUSINESS REPORT