Wall Street Analysts See Risks Sparking ‘Growth Fear’ for Global Markets
The Bronze Charging Bull in New York’s Financial District.
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LONDON – With the increase in Covid-19 cases due to the increase in the delta variant and a series of macroeconomic changes, the global market narrative has shifted from “gold loop to fear of growth “, according to Barclays.
In a research note Monday, the UK lender suggested that hedging remains warranted for investors given the swirling crowd of downside risks, but argued that the recent sharp reversal in reflation trade was “overdone.”
“With the combination of data no longer providing positive surprises, the growing evidence that labor supply and shortages could mean stiffer inflation, China’s increasingly determined crackdown on various industries and the Growing risk of the COVID delta variant have coincided with enough force to give markets a fear of growth, “said Emmanuel Cau, head of European equity strategy at Barclays.
Cau pointed out that the prospect of weaker growth and higher inflation is driving large and somewhat erratic asset price movements, with the recent dramatic drop in yields being the most obvious indicator.
“So far, stocks have held up relatively well, but this contradicts the great risk of sub-surface turnover, which has largely erased the positive returns from reflation trades,” he said.
Additionally, low summer liquidity and mixed messages from central banks add to market confusion and likely worsen sudden moves, Cau added.
A “restless summer”
In recent weeks, the US Federal Reserve has discussed plans to scale back its quantitative easing program and forecast two interest rate hikes in 2023, while the European Central Bank has opted for a much more dovish tone, and the central bank of China has indicated that it is ready to re-stimulate the world’s second-largest economy.
Barclays believes it is “far too early” to call the end of the cycle or to call the combination of weaker growth ahead with stiffer inflation “stagflation”, which it says would require much lower growth. and much higher inflation.
“However, with the vaccines, the reopening and the US fiscal stimulus behind us, and only the second quarter earnings season ahead as an obvious catalyst for reconnecting markets with healthy fundamentals, we could be in for a turbulent summer.” , Cau said.
While Covid vaccines successfully reduce death and hospitalization rates, the growing dominance of the delta variant and the risk of others, and the potential impact on countries with lower vaccination rates, continue to disrupt the outlook, Barclays said.
After being bullish in European stock markets throughout the year, Barclays analysts recently revised their stance to suggest that the risk / reward ratio of owning “stocks has become more balanced, which justifies a more balanced sector / style allocation and hedging with cheap volatility “.
“Last hurray” for the value, but be careful in advance
In a June survey of its institutional clients, Citi found that investors had a clear preference for value stocks – those considered cheap relative to the fundamentals and financial performance of the company – especially European stocks. , raw materials and hydrocarbons.
In a note Tuesday, Citi analysts said a “last hurray” was likely as economies continue to reopen, especially with Europe lagging behind the United States.
However, Citi’s chief US equity strategist Tobias Levkovich suggested that with an average rise in US stock prices of 40% between June 2020 and June 2021, a risk-reward review was needed.
“We see a downside (risk) of 10% versus a potential gain of 1 to 2%. However, many portfolio managers we speak with are increasingly optimistic, suggesting that the qualitative background is synchronizing well with our quantitative measures, ”Levkovich said.
He added that investors seemed “too comfortable with the valuation being solely a function of low interest rates, even though equity risk premiums are well above usual levels before the global financial crisis.”
Equity risk premiums measure the excess return an investor can expect from a stock market investment over a risk-free rate of return.
“While the ERP has fallen from last year’s highs, the numbers are still high, as accommodative central bank policies come at an ultimate cost and investors are aware of it,” Levkovich said.
“In addition, the removal of interest rates means that the Fed’s or the ECB’s forecasts for sustainable GDP expansion are not particularly convincing.”