Time to take some profits
February brought a sudden, even if long expected end to the calm and steady rising equity market conditions. We wrote at length during the month what triggered the correction and what it is likely to mean going forward. In a nutshell, we agree with the view of many respected investment research institutions, that the return of more resilient global economic growth means that the end of the deflationary era has finally arrived. This will lead to a gradual normalisation of interest rates and bond yields away from the ‘lower zero bound’, but probably not higher than 3.5 – 4.5% over the remainder of this rate cycle. This reduces the relative attractiveness of equities and makes extended equity valuations less easily justified.
Schrödinger’s markets: don’t fear growth and higher rates
Trying to make sense of markets in 2018 is a bit like attempting to understand quantum physics. Today’s markets feel a little bit like Erwin Schrödinger’s famous, but mind-bending, thought experiment. Until someone actually checks, his imaginary cat that sits in a sealed box is simultaneously alive and dead.
UK Retailers feel the chill
It’s been a difficult week for UK retailers. Wednesday saw two well-known high street names go into administration, as both Toys R Us and electronics store Maplin fell into financial disaster. The troubles didn’t stop there for high street shops. On Thursday, Carpetright warned that its profits had been so dire that it risks breaching the terms of its banking covenant, while restaurant chain Prezzo has announced the closure of 100 branches and clothing store New Look may have to close up to 600 branches in a restructuring plan.
BoJ charts its own course
Japanese monetary policy is important not just to the Japanese economy, but also to global growth and asset prices. Recently, given positive growth and rising inflation in Japan, there have been rumours circulating in markets that just like in the US the easy money policy may be about to end. We are not so worried.
It’s ‘political risk’ with Chinese characteristics this week. Over the weekend, the government in Beijing announced an amendment to the constitution which removes the two-term Presidency limit, paving the way for Xi Jinping to rule the country past 2023. Along with the recent weak economic data – with China underperforming all the other major emerging markets over the last four weeks – some media outlets blamed Beijing’s ‘Xi forever’ message for negative investor sentiment on China. The FTSE China index fell around 3% over the last week, putting it 11% down over the past month. For context, the MSCI emerging market index fell by only 0.6% this week.
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