From Record Highs to Equity Exodus amid Rising Global Risks
By Dr. Dan Steinbock
This is the year of historical, elevated economic, political, strategic, and policy risks. Until recently, these potential perils were largely discounted in the market – but now the unease is evident and rising.Ostensibly, US markets are not far from their all-time highs. And yet, the most watched market indices reflect extraordinary unease about the US economy.For now, major observers acknowledge that US equities have failed to reach new heights and US economy does not reflect consumer and business confidence. Nevertheless, they continue to believe that global yield curves, which are perceived as the most powerful predictors of business-cycle fluctuations, do not yet suggest the coming of a global recession.Market veterans quote the old adage, “sell in May and go away,” but the current disquiet is not just seasonal. It reflects deeper concerns as well.The great disquietThe story of major market indexes is not inspiring. A year ago, the Dow Jones Industrial Index (DJIA) soared to almost 18,300; after the plunge of the first quarter, it is hovering around 17,700. Similarly, the Standard & Poor’s 500 exceeded 2,100 a year ago; after the February lows, it is struggling to stay above 2,050. According to prudent valuation measures, these figures remain grossly overvalued. Similar concerns are evident in initial public offerings (IPOs) and mergers & acquisitions (M&As), which typically precipitate market trends. Recently, two major Wall Street firms – Bank of America and Citigroup – warned that, as markets are tightening, equity IPOs are their lowest since 2009, while M&A deals suffer from a significant slowdown. Indeed, major Wall Street firms, which usually epitomize optimism, have recently become bearish, including Bank of America, Citi, JP Morgan Chase, UBS, and even the bullish-to-the-end Goldman Sachs. However, the unease is expressed in cautious terms because key players do not want to contribute to circumstances in which a perceived shift in investor risk perception itself would trigger a fall. New concerns are fueled by the great equity exodus. Between early April and mid-May, capital outflows soared to almost $45 billion, which some analysts have termed the “largest redemption period since August 2011.” That’s when Washington’s debt crisis sparked a credit rating downgrade, which pushed US equity market in the bear market territory. In the past decade, only the plunge of fall 2008 has been worse.Meanwhile, some analysts suggest that four of five fund managers have underperformed their benchmarks, which has sparked apprehension and alarm. Why risks are about to increaseAlong with Washington, Wall Street tends to see China’s growth deceleration as a prime culprit for rising risk perceptions. While the mainland is coping with challenges amidst rebalancing and deleveraging, China has potential to grow 3-4 times faster than major advanced economies, as long as reforms broaden.Another great concern is Japan, where dreams of a solid rebound in 2016 have crashed as another contraction looms in the horizon. Moreover, policy risks could also heighten rapidly in mid-June if the Fed resorts to a hike prematurely. In the Eurozone, the cyclical rebound lingers, despite the central bank’s repeated QE injections. France and Italy are coping with rising challenges and old concerns about the Greek debt have surfaced. Even worse, in late June, the UK “Brexit” referendum will be preceded by rising economic uncertainty and market volatility – which could spread further, if the opposition would triumph in the subsequent Spanish elections.Should the OPEC decide in its June meeting not to limit oil output, new concerns would follow. If, for instance, US energy firms would suffer more defaults, credit problems would deteriorate for banks, private equity and hedge funds. More consequential risks will ensue with the Democratic and particularly Republican Party conventions in late July, which could escalate uncertainty and volatility until November.Indeed, the market unease is fueled by a long list of investor concerns whose full weight is likely to increase in the coming months.
The Trump-Xi Summit Paves the Way to New ...
South Korea, 3 Other Dragons in Decline?
After The Trump Triumph
Dr Steinbock's Interview on the Trump Triumph
What If Clinton Wins?
The Coming Revolution of Chinese Robotics
Struggle for Brazil & against BRICS
Tale of 3 Disney Cities in East Asia
Renminbi as the 5th Int'l Reserve Currency
Behind the Trans-Pacific Partnership Talks
China's Big Debt Swap
Russian Economy Is Ready to Grow
Trans-Atlantic Scramble for Free Trade Deals
Twin Peaks in Sino-US Relations 2015-2020
Through Greece, China's EU Strategy Is Winning ...
America, China and the Islamic State
Dr. Dan Steinbock is research director of Int'l Business at India, China & America Institute (ICA), fellow at Shanghai Institutes for Int'l Studies . The expert on G-7, BRICs economies, and U.S.-Chinese ties taught at business schools of Columbia University and NYU, and at Helsinki School of Economics. He has appeared world's major TVs and written columns for leading newspapers.