The bags continue to party. Although the real economy seems to have peaked (the peak of growth would have been left behind), risk assets continue to advance unstoppable amid a rally that more and more analysts call “unsustainable”. After a staggering recovery, the economy and markets are now facing a harder part of recovery which will have an impact on the profits of companies and the perception of risk by investors.
Citi analysts have published a note analyzing the evolution of the exchanges whose headline says it all: “Winter is coming”. The economic recovery begins to lose momentum, while inflation does not recede. This can create a less comfortable scenario for risky assets (especially stocks) that are reaching very high valuations.
“China’s slowdown in growth and concerns about global inflation could bring headwinds to risky assets. The outlook for global interest rates remains murky for market participants, while US credit markets They have reacted mixed to rising yields. Global equities are likely to come under pressure in the coming months, “Citi economists say in a new client note.
The great threats
-The slowdown in China and what is to come. The ‘Asian giant’ has been one of the major contributors to global growth during the recovery. Now, China’s economy is hitting the brakes and doing so hard. The energy crisis that the country is experiencing is weighing down industrial production, while the new model that seeks to achieve a more balanced economy will be an obstacle to growth in the short term (transition period). This process can be complex to manage for the thousands of companies that have their production points in China and that are already suffering from bottlenecks and a strong boom in transport prices.
Furthermore, Citi analysts believe that “China’s coal and power supply crisis will persist into the winter … this crisis is expected to force a 12% cut in industrial energy use in the fourth quarter of the year, increasing stagflation risks and growth pressures. Bad data during China’s National Day Golden Week may be hinting at a bumpy road for consumption to rebound. ”
On the other hand, these experts explain that rising gasoline prices and interruptions in the supply chain have boosted the inflation outlook for the euro zone, which may end up damaging consumption of goods and services. On the other hand, the US labor market continues to present certain tensions that will increase inflationary pressures. All of the above “increases the risk of a Fed policy, ultimately, more aggressive,” they assure from Citi.
-The ‘patience’ of investors with inflation may end. From BNP Paribas they warn that “the sensitivity of the market to inflation data may increase although expectations remain relatively anchored. As the inflation rate has been above the central bank’s target for some time, this could reduce the patience for prices fall below the 2% target. This increased sensitivity should lead to higher volatility in the bond and equity markets, which in turn can affect the real economy, “warns William De Vijlder, Chief Economist by BNP Paribas. It is precisely in inflation that another risk for the stock markets arises: a more restrictive monetary policy.
-A more aggressive monetary policy. Inflation that is more persistent than expected and higher than expected is putting central banks in a difficult situation. The Federal Reserve could be forced to withdraw stimulus more aggressively than anticipated and advance its prospects for raising interest rates. This in turn would lead to higher nominal interest rates (lower bond prices) that could also affect investors’ perception of risk and, therefore, stocks. Bank of America Merrill Lynch also believe that risk assets may be the main victim of more restrictive central bankers.
Against this ‘macro’ and financial environment “global equities are likely to come under pressure in the coming months. Rising bond yields and weakening earnings per share are headwinds for equity valuations. In addition, the Levkovich index revealed at the beginning of the first quarter that there were a historical probability of 100% of bear markets in the USA in a period of 12 months “, culminate the economists of Citi.
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