The past few months have been quite trying for investors and traders in the financial and commodity markets. The markets have been jittery, and indecisive. Obviously, the market participants are becoming somber in their market outlook for the short term.
The global order is perhaps undergoing a major
reset and the picture of emerging global order is incomplete. Consequently, the
present global economic, geopolitical and financial conditions are quite
uncertain and challenging.
As per the conventional wisdom, at this time
the investors should be busy assessing the likely contours of the emerging
global order, forecasting the investment opportunities and positioning
themselves as per their assessments; whereas the traders should be deciphering
the opportunities arising due to the transition. The shifting investors’
positioning may create opportunities for the traders in the markets.
I noted the following key trends in the markets
to assess how the investors’ positioning is shifting and where traders are
finding opportunities. However, I am not sure if the current market
positionings are totally in consonance with the conventional wisdom. Maybe, it
is early days in the transition; or the uncertainties are too much; or it’s a combination of both. Perhaps, we would know this with the benefit
of hindsight only.
1. After
lagging the emerging markets for 15years, the developed markets have started to
outperform in the past one year. Prima facie it may look like a case of rising
risk aversion amongst global traders. But investors must be appreciating that
the risk in developed markets is much more pronounced than the emerging
markets. The central bankers may have exhausted the newly acquired monetary
policy tools that supported the developed economies and consumers in the post
Lehman era. Unwinding of unsustainable liquidity and debt may bring more
developed economies to the brink than the emerging markets.
For example, in the past 5years most of the
sovereign debt issued in the Euro area has been bought by the European Central
Bank (ECB). The countries that infamously came to the brink during the global
financial crisis (Spain, Italy, Greece etc.) have raised huge debt without
demonstrating any sustainable improvement in their servicing capability. Now
since the ECB is unwinding its bond buying program, next year over EUR250bn
worth of sovereign debt will have to be sold to the private investors who may not
be as obliging as ECB has been in the past 12years. Unsustainable debt at the
time of rising rates would make these countries riskier than the emerging
markets like China, India, Brazil, Korea etc.
Even the USA, is facing a stagflation like
condition. Rising rates may make USD stronger and hurt the US exports, further
pressurizing the growth.
2. Most
of the countries are struggling with inflation that is mostly a supply side
phenomenon. However, instead of improving the global cooperation to ease the
supply chain bottlenecks and stimulate investment in further capacity building,
most countries have chosen to stifle the global cooperation and invest in local
capacities. This will (i) prolong the present supply shortages and (ii) have
far reaching implications for global trade and cooperation.
3. Investors
have not preferred the conventional safe havens like gold, CHF, US treasuries
etc. in the past one year and the EM currencies have not sold out the way these
used be in past instances of extreme risk aversion.
4. Numerous
experts are calling for commodity supercycle and persistent inflation. This is
a clear case of mistrust in effectiveness of the central bankers, who have not
only successfully averted two major disasters in the past 12years – first the
global market freeze post Lehman collapse and secondly global lockdown post
outbreak of pandemic. I find no reason to believe that they will fail in
reining the inflation using monetary policy tools. In fact most commodity
prices have shown signs of peaking after the US Fed's aggressive posturing on
monetary tightening. Higher cost of carry, tighter margins and slower growth
should kill the inflationary expectations in no time; particularly when most of
the commodity demand could actually be speculative or in anticipation of future
demand assuming the present tightness in supply to continue.
For record, the commodity heavy stock market of
Brazil has been one of the worst performers in the past one month.
5. The
criticism of cryptocurrencies is weakening and their acceptance is rising by
the day. Many harsh critics of cryptoes have softened their stand to
conditional criticism. While the opposition to cryptoes use as currency is
still strong, their role as store of value is gaining wider acceptance.
Obviously, it will have implications for Gold and USD –the two most important
conventional ‘store of value’ instruments.
6. The
global investors seem to be losing hope in China now. Till last year the
valuation argument was very strong in favor of Chinese equities. No longer is
the case. Despite 15yrs of no return, not many are arguing convincingly for
Chinese equities now.
7. The
Free Trade Agreement (FTA) between the UK and India may be a positive
consequence of Brexit for India. The FTA with Australia has also been signed.
India has defended its bilateral trade relations with Russia despite immense
global pressures in the wake of ongoing Russia-Ukraine war. Besides, the UN has
not taken any significant measures to end the war.
It has to be seen whether we are entering an
era of bilateralism at the expense of dissipation of multilateralism. If that
be so, the role of the multilateral charters like WTO, UN, IMF etc. will have
to be reassessed in the emerging global order.
