The fact that there could be bigger trouble ahead for developed economies is currently the main hypothesis about next year 2019 according to a growing number of market analysts.
Weaker trends here may indicate better trends over there, underlined Morgan Stanley (MS) whose research team emphasized in its Global Strategy Outlook report for 2019 that after a rough 2018 for stocks in Emerging Markets (EM), a turnaround could be just about to start.
As a result, MS has upgraded EM stocks from “underweight” to “overweight” for 2019, while it has downgraded US equities to “underweight”. Thanks to a rise in bond yields and very good figures in economic growth, US stock market accumulated much foreign capital over the last year, leading DJIA and S&P500 to unprecedented tops.
Since then however, mostly the rate hikes policy of the Federal Reserve (Fed) and the ongoing uncertainty around President Donald Trump’s trade feud with China and the European Union (EU) have led global markets into correction territory.
In the meantime, EM markets have gone into a contrarian move against developed markets with Chinese index going south, if not halving, since 2014, and political tensions drove Turkish and Argentinean currencies into hot waters. Now that the MSCI Emerging Markets Index has dropped by 16 percent YTD, MS expects it to rise 8 percent by December 2019, twice as much as the 4 percent forecast for both the S&P500 and MSCI Europe Index.
“We think the bear market is mostly complete for EM. (…) We are taking larger relative positions and adding to EM,” reads the Morgan Stanley report, putting its “overweight” focus on “value stocks” from Brazil, India, Indonesia, Peru, Poland and Thailand.
On June 12, 2015, the Shanghai Composite Index (SSE) jumped to 5,166 points while its US counterpart Dow Jones Industrial Average (DJIA) rose to 17,898 points at an even more moderate pace.
Three-and-a-half years ago, therefore, it was on the Chinese side that investors were looking for strong growth potential, at least in the value of their quoted shares as the recovery of the US economy backed global growth.
Today, the cards have clearly changed hands since the situation is more or less reversed with the SSE which has fallen to 2,598 points, down 49.71 percent since its top of June 2015, and with the DJIA which despite entering the correction zone in October 2018, however, remains at a historically high level at 24,688 points, up 37.93 percent in the same period.
Against the backdrop, the gradual decline in Chinese economic growth and President Xi Jinping’s ambition to turn his country from the workshop of the world into a consumer economy have contributed to this sharp stock market depreciation of Chinese assets even though the peak of 2015 appears a posteriori as a typical buyer excess.
Considering the long-term potential of China and taking into account the ups and downs of its trade negotiations with the United States, it seems relevant to look now for possible good buying opportunities in the Chinese market, especially in the consumer and energy sectors.
The question of whether we are about to experience a stock market crash is on everyone’s lips. In the United States, the Dow Jones Industrial Average (DJIA) has lost 7 percent in less than a month and is dangerously close to a correction.
In Europe, the German DAX index lost 9 percent and its French counterpart the CAC index lost 10 percent indicating that the continent is already in corrective territory. In Asia, the Hong Kong HSI index showed a significant downward trend as of September 10, and the Shanghai SSE index yet dropped a bit less by 6.7 percent over the same period, but fell sharply by 23.5 percent over the last twelve months.
Against the backdrop, several issues participate in this correction, something that analysts fear it could turn into a depression after nearly nine years of uninterrupted rise in developed markets.
First, Chinese growth is weakening, then, the euro area is experiencing tensions with the first ever rejection of the Italian budget by the European Commission, finally trade tensions are increasing since the election of Donald Trump at the White House.
However, the fundamental reason is twofold and comes from the United States with a US economy so attractive that it draws foreign capital to the detriment of other countries, especially emerging and emerged ones, and most importantly with the rate hikes unanimously envisaged by the US Federal Reserve (Fed)’s members according to the minutes of the latest FOMC.