The numbers are in for first quarter performance for global stocks and bonds. Taken at face value, the price signals emitted by public markets contrast quite a bit with what they were predicting last year for the global economy. Yet the economic and policy realignments implied by markets may well fall on deaf ears when it comes to immediate and durable changes in the behaviour of key economic actors.
Judging from their absolute and relative performance, last year’s markets correctly signalled a better growth trajectory for advanced countries, overall and compared to their counterparts in the emerging world – the most notable contrast pitting enthusiasm for a Japanese rebound against Chinese growth pessimism.
Within the advanced world, markets strongly favoured innovations in the tech sector, viewing disruptive technologies as significant value creators both directly and via acquisitions. Energy was deemed a major differentiating theme, with the considerable US lead on fracking constituting a game changer in terms of competitiveness.
Throughout last year, markets also signalled strong faith in the power of central banks – particularly the determination of the European Central Bank to stabilise peripheral eurozone countries, and the Federal Reserve’s commitment to artificially low policy rates even at the risk of damage down the road. Importantly, all of the world’s systemically important central banks were seen pursuing a highly correlated policy stance; and markets were timid about testing central bank resolve.
Based on this year’s first quarter market performance, however, several of these 2013 themes have been turned around in the context still of an overall signal of a stronger global economy – raising the intriguing question of whether markets simply overdid the relative price moves in 2013 or, more consequentially, are now signalling the potential for a global economic and policy realignment.
Judging from recent price movements, markets are more constructive about emerging economies – and this notwithstanding some perplexing pockets of geopolitical uncertainties in Africa, Asia, central and eastern Europe, Latin America and the Middle East. In contrast, the prospects for Japan have dimmed considerably. Elsewhere in the advanced world, enthusiasm is more muted relative to last year, though prospects for peripheral Europe continue to brighten.
The love affair with new disruptive technologies has also started to fade. Indeed, this is part of a more general phenomenon of greater market differentiation both within and across sectors.
Differentiation is also visible in markets’ assessment of central bank policies. With recent changes in interest rates and steeper yield curves in the advanced world, forecasts of high policy correlations have given way to significant disparity – particularly between the projected dovishness of the Bank of Japan and ECB versus current anticipation of more hawkish measures out of the Bank of England and Fed. Markets even seem more willing to test the steadfastness and effectiveness of forward guidance.
Needless to say, not all of the first quarter’s price movements should be interpreted as market signals of the economic and policy outlook. Mean reversion tendencies are typical, particularly given the extent of some price moves in 2013. Moreover, with the supportive volatility environment in the first quarter, the appetite for carry is also considerable, helping to pull up some of the 2013 laggards such as emerging market local and external bonds.
Nevertheless, it is hard to deny that first quarter market developments suggest a further evolution in what remains a fluid multi-speed global economy. Yet, interestingly, its full realisation requires validation in the form of overcoming a level of corporate risk aversion and government policy paralysis that remains unusually high, frustrating the most important agent of economic change today – namely, business and infrastructure investment.
Part of this reflects genuine uncertainty as to whether domestic politics and the global architecture can actually support the type of evolutions implied by markets. Part is greater concerns among some corporates about the potential cumulative impact of geopolitical tensions around the world. The biggest part, however, are the pain and difficulties associated with midcourse corrections in today’s political and economic environment.
Dominated by liquid transactions, public markets can reposition themselves and recalibrate their signals quickly. Not so for governments who lack sufficient political flexibility; and not so for companies whose investment decisions often commits to a certain path for three or more years.
For proper validation, the first quarter’s market signals still have to contend with what has become a considerable degree of inertia among key decision-making entities.
Mohamed El-Erian
Fonte: FT
