Equity markets expected to end year on a high note
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FINANCIAL MARKETS in the past few months were dominated by uncertainties associated with an increase in the US Fed funds rate and concerns over the health of the global economy, driven largely by the slowdown in China and commodities exporting countries.
Global trades slowed markedly, forecasts for growth in gross domestic product have been cut, and global equity markets posted the worst quarterly returns in four years. Pessimism became the consensus.
Many fear that such a pandemic slowdown in the global economy will persist and stock markets will remain under pressure throughout the rest of the year.
We argue that global equities will remain on an uptrend and the recent equity markets correction is close to running its course. We expect the markets to recover in this quarter because of three important market drivers.
First, valuations suggest that the downside in stock markets is quite limited. Price-to-book ratios in many emerging markets are below the levels seen in past corrections. Foreign outflows have stopped and fund flows have returned to emerging markets in the past few weeks, suggesting that cheap valuations have started to attract investment.
Second, there is speculation over further policy easing from the Bank of Japan (BOJ) and the European Central Bank (ECB), which could provide positive catalysts for the markets.
After the global financial crisis in 2008, large quarterly slumps in stock markets were usually followed by a strong rally in the subsequent quarter, fuelled by swift policy responses from central banks. That could also be the case in the final quarter of this year.
Speculation over additional easing has recently intensified as inflation turned negative both in Japan and the euro zone.
The US Federal Reserve’s rate-increase delay caused the yen and the euro to strengthen, weighing down the outlook for future inflation as import prices fall.
A recent survey revealed that most economists expect both the BOJ and the ECB to expand quantitative easing programmes by the end of the year to fend off deflation threats.
Last, a pick-up in China’s economic activities could alleviate the fear of a global slowdown. China’s GDP growth, which decelerated to 6.9 per cent in the third quarter from 7 per cent in the first half of the year, will likely recover this quarter on the back of a rebound in government spending and a |resurgent property market.
China’s Purchasing Managers’ Index, which has showed signs of contraction since August, will likely improve this month as fiscal spending on infrastructure projects kicks in.
We expect the markets to end 2015 on a higher note, as these drivers emerge during the rest of the year.
Komsorn Prakobphol is head of strategy at Tisco Economic Strategy Unit. He can be reached via www.tiscowealth.com www.tiscowealth.com or [email protected].
