Short View

Financial Times USA - - COMPANIES & MARKETS - Michael Macken­zie

Among the ranks of as­set classes, equities are usu­ally the last to leave a mar­ket party. Now, as the mu­sic fades, US and global in­vestors face a dilemma. Some might well buy the dip in stock prices, buoyed by a first-quar­ter re­bound in rev­enue and profit growth for com­pa­nies. Oth­ers will prob­a­bly re­con­sider their faith in Trumpfla­tion as po­lit­i­cal risk, with Brazil join­ing the fray yes­ter­day, has taken cen­tre stage when there are cracks in the global growth story.

The bot­tom line for in­vestors is that the chaos en­gulf­ing the US ad­min­is­tra­tion sig­nif­i­cantly re­duces the prospect of Don­ald Trump im­ple­ment­ing sweep­ing tax cuts, dereg­u­la­tion and in­fra­struc­ture spend­ing that pro­pel the economy into a much higher gear.

Dis­turbingly, this re­set in US fis­cal ex­pec­ta­tions comes when that other prime en­gine of global growth, China, has been clamp­ing down on ex­cess credit, trig­ger­ing in­ter­bank lend­ing stress. Slid­ing com­mod­ity prices sig­nal ex­pec­ta­tions that China’s economy is eas­ing after a six-month spurt through to the end of March.

To­gether, the loss of mo­men­tum from the US and China en­tails a po­ten­tially tougher macroe­co­nomic en­vi­ron­ment for global eq­uity, credit and emerg­ing mar­kets this sum­mer. With in­vestors in Brazil, one of this year’s pop­u­lar EM desti­na­tions, sud­denly be­ing pun­ished, the risk of a broader pull­back in risk ap­petite beck­ons. In such an en­vi­ron­ment, in­vestors tend to sell their win­ners to help cover losses from sink­ing lever­aged carry trades.

In this light even Europe, a big ben­e­fi­ciary of in­vestor flows and a re­gion that has out­per­formed the US this year, looks vul­ner­a­ble — and that’s be­fore the pain of a stronger euro putting pres­sure on cor­po­rate earn­ings.

John Brady at fu­tures bro­ker­age RJ O’Brien says buy­ers of the dip will emerge, given the large amount of cash on the side­lines. “If equities go on sale for cer­tain sec­tors like tech, in­vestors will put money to work,” he says.

Be­yond short-term po­lit­i­cal noise, the risk of global re­fla­tion ebbing means that the days of high-fly­ing eq­uity bench­marks and slum­ber­ing volatil­ity look dated. After a rol­lick­ing ride since Novem­ber, even those buy­ing the dip will want to see ro­bust macroe­co­nomic data be­fore they re­sume push­ing eq­uity val­u­a­tions ever higher.

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