Michael McKinsey from London
Flexible stock markets suggest last week that investors well with understanding of how they can be chaotic geopolitical situations to open up opportunities for the allocation of new funds.
Over the past 18 months during which the United States and China fought a protracted trade war, there have been regular bouts of weakness in the stock and bond markets. Buying during those declines was rewarding, but here one must recognize the crucial role that highly supportive central banks have played, and against the backdrop of lower government bond yields. In short, owning stocks and other risky assets is still very attractive, given the limited positive side resulting from keeping expensive bonds that offer minimal fixed interest rates. This helps explain much of the appreciation in stocks last year, despite the small growth in corporate earnings
In fact, with oil rising briefly last week, against the backdrop of comments good warns of price shock and the escalation of the largest events in the Middle East, the relatively optimistic response in the stock was a sign of two things: first, began the US Federal Reserve to expand its balance sheet again, weighing on the dollar and boosting the prices of risky assets. Second, traders considered that the risk of Iran attacking oil shipments in the Strait of Hormuz is low because China - one of Tehran's few friends - derives nearly half of its crude imports from the region.
Another factor in equity investor accounts - a factor that ultimately pushed Wall Street back into a record area and led to intensity in haven and oil trading on Wednesday - is a discreet message from US President Donald Trump, who seemed to have backed away from a military confrontation with Iran. This position confirmed the prevailing view among investors that in the election year, the last thing the US economy needs is the volatile oil price and the impact on consumer and business confidence.
When measuring the current resilience of stocks, you also have to bear in mind that investor positions for most of the past year were generally defensive, until the last quarter's buying spree pushed the MSCI global index to a record high. Financial markets and bond funds attracted record inflows last year, while global equity fund sales - which recorded net outflows of $ 143 billion - were the lowest in three years, according to the US investment bank Jefferies, despite the quarter boom. the fourth.
The embrace of shares mentioned at the end of the year is a sign of how sentiments are coherent about a global economic recovery that is achieving better earnings growth in 2020. This conviction can set a minimum share for a period of time.
Among the key questions for 2020 are whether central banks have paved the way for an extended economic cycle and whether corporate profits will rebound to ease pressure on margins. Investors may have to wait until April - as soon as possible - to judge evidence of a continuing boom in activity and profits. So while market mood may fluctuate over the coming months, any declines are likely to attract buyers awaiting price declines.
But this is an accurate scenario, given that much good news is already listed in the stock markets. Analysts at Unigestion note that basic valuation ratios, such as the enterprise's value of sales, or price to book value, "illustrate the costly reach of US and European stocks."
Prices are similarly high in corporate bond markets. Amidst all the noise during the past week, credit risk premiums were barely budging from their tight levels. This type of behavior tends to increase the appetite of stocks because tensions in the bond markets have in the past sparked stock market crashes.
Analysts at the Federal Reserve in New York last week looked at the astonishing rise in the size of bonds issued by companies with a credit rating slightly higher than the rating of risky bonds, considering that this "may raise concerns about financial stability." Analysts pointed out that the importance of profit growth and stronger global activity in 2020 should not be lost on the minds of investors, given that the companies that have these ratings now carry larger net debt, compared to their operating profits.
So, the main lesson last week is: political developments are important, but the final judgment on stock performance and credit in 2020 depends on whether higher valuations are backed by stronger economic data and earnings.