Doubts concerning a change of course presented by the Fed at its monetary policy last December, are rapidly materializing. The impression one has is that it acted more to safeguard the institution’s credibility, rather than based on fundamental valuations, it is clear from recent statements by the Governor Yellen, voicing concerns regarding the economic slowdown both domestic and international and downward revisions to corporate earnings estimates. So the US central bank appears to have expanded its institutional mandate taking into consideration also the international situation, resulting in the gravitation towards external dollar parity in the evaluation framework. In practice, without a downward correction of the greenback, it is difficult to predict a recovery in the international economy heavily dependent on the trend of emerging economies. The fact that the expectations of the experts on the increase in the cost of US money, going from 4 increases planned for 2016, to two, and now a moratorium is even suggested until the presidential elections, implying a lower value for the dollar. Probably for this reason, there has been a resumption of liquidity flows to some Asian markets such as Thailand, Singapore, Malaysia, the Philippines and Korea, while China has at least registered a decrease in the monthly outflow of foreign exchange reserves from more than 100 billion dollars per month to about 50 in March. However, the Chinese central bank, the PBOC, has not loosened its monetary policy even if it appears safe to assume that the Chinese GDP is not growing at 7% as officially stated, but more likely in the order of 3 – 4% in real terms. For an economy committed to becoming less dependent on exports and more oriented to the development of domestic consumption, the economic downturn has the same value of a recession in our latitudes, requiring a prompt response by the government and the monetary authorities.
The deficient Chinese response to this problem is negatively affecting also the Japanese economy which entered a moderate recession in spite of all the efforts made by the government over the past two years. So the strong dependence of the Japanese economy with respect to the Chinese and the recent strengthening of the yen against the dollar, leave little doubt that the Tokyo Stock Exchange does not present a particular attractive opportunity. In summary, it could be argued that during the recent G20 in Shanghai there was a “behind the scenes” that reminds one of the Hotel Plaza Agreement of years ago, which was designed to gradually revitalize the devastated emerging economies through the increase in the value of raw materials caused by the devaluation of the US dollar. In light of this hypothesis, the most compelling investment opportunities both in terms of assessment or potential, are represented by corporate bonds in local currency and the shares issued and listed in emerging countries, especially Asian markets already mentioned. In fact, especially in Europe, but also in part on the other side of the Atlantic, the returns of fixed income have suffered a compression such that no longer justify in any way, risk-taking that such investments present while on the equity front the US indices are not very far away from historic highs while European markets have scored a stunted recovery despite the marked support arising from the recent decisions of the ECB. The strong recovery reflected by the US indices in March can not be explained only as a technical rebound that usually follows a period of oversold, it seems rather to discount the positive fundamentals which are hard to find, since the FED itself is doubtful on the US economy. The chicken will come home to roost in late April with the first quarterly results of companies that are likely to be very disappointing and coinciding with a marked reduction in buyback of shares by listed companies. For European markets the scenario is similar, if not worse, as the recovery has been modest and the prospective scenario could worsen in relation to the gradual loss of value of the dollar. So the bear market that started moderately last August and got underway in December, has not yet exhausted its push which could represent itself in late spring.
Nicola Bravetti Fonte dati: Bloomberg