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 15 years, 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 5 years 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 euro 250 billion 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 12 years. 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 12 years – 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.
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