As cyclical upswings don’t last forever, we need at this stage to keep our eyes peeled for any signs of inflection, Didier Saint-Georges writes in his essay on finews.first.
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The rebound in global economic indicators, commodity prices and inflation got going slightly over a year ago, when China initiated its credit-driven stimulus programme. The question today is what the next phase of the cycle will bring.
The Chinese government has taken steps to rein in the country’s bank lending boom. On a global scale as well, we are likely to see renewed pressure to tighten financing conditions now that political risk has ceased to be a valid argument for maintaining extra easy-money policies. If nominal global GDP growth (real growth plus inflation) continues to rise, even at a moderate pace, central banks will be compelled to move faster to normalise monetary policy in the second half of the year.
«Market valuations are not a factor that can set off a trend reversal»
As a consequence, the upward trajectory in asset prices can be expected to slow. The Federal Reserve (Fed) will certainly take such action, as will the People’s Bank of China. At the same time, the ECB will have to clarify its intentions.
Nor will such a shift in central bank policy only affect cyclical stocks, which have recently scored impressive gains. Tech stocks have been trading at premiums to average price-earnings ratios not seen since the dot-com bubble in 2000.
In and of themselves, market valuations are merely a reflection of investor perceptions; they are not a factor that can set off a trend reversal. But they most certainly are a source of fragility. They heighten the potential for over-reaction to external shocks or disappointments – which may plausibly occur in the second half of the year.
«The new primacy of economic fundamentals lends greater legitimacy to fundamental analysis»
To summarise, the new primacy of economic fundamentals over market movements lends greater legitimacy to fundamental analysis. And today that analysis shows that underpinning the gains made by those markets in the past year is a global economic cycle buoyed by Chinese stimulus and by hopes that we will see expansionary fiscal policies coupled with highly favourable monetary policies.
It also reminds us that cyclical upswings don’t last forever, and that we need at this stage to keep our eyes peeled for any signs of inflection.
Didier Saint-George is a managing director and member of the investment committee at French fund management firm Carmignac Gestion.
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