In the aftermath of an unusually quiet month for stock markets in August, indeed a positive one, given that some US indices were able to revisit the pre-Covid all-time highs, the recent return to normal trading volumes has led to greater volatility on international markets, without, however, inducing change in the underlying trend in place since last April.
The midsummer period also witnessed an unusual calm on the currency markets where the dollar, after a marked decline since June, stabilized around 1.18 against the Euro, irrespective of stock market dynamics. An explanation could be found in the changed exchange rate strategy adopted by the PBOC, aimed at stabilizing the Yuan against the dollar, as happened in the 2015/2016 biennial period. In practice, since 2017, when an Asian agreement on exchange rate stability was established, there has been no appreciable weakening of the Chinese currency, as had happened in the previous twenty years. While the aforementioned decline in the dollar can only be attributed to the activity of the Fed in recent months, as the same has recently confirmed, declaring its interest in a resurgence of inflation to be obtained also through a multi-year policy of zero cost of money to weaken the greenback. If we add to this the massive liquidity creation implemented by the FED since April and the sharp increase in sovereign debt issues in Europe, linked to the pandemic phenomenon, which added to the decreased flow of Chinese liquidity to the US; then a forecast for the medium term for Euro / Dollar exchange rate at 1.25 does not seem out of the question. A sure consequence of this changed attitude by the FED and of the will of the Asian monetary authorities to keep exchange rates stable, will be a positive trend reversal of the dynamics for the Asian stock markets, including the Japanese stock market, given that to keep the exchange rate stable it is necessary to neutralise the inflows of dollars from abroad, monetizing them and therefore increasing the liquidity available in the single credit system. As for the Japanese stock exchange, it is worth noting that it is at the lowest valuation level compared to Wall Street in the last 50 years, while the profitability of Japanese companies has increased tenfold in the last twenty years compared to that of US companies. which has remained substantially stable.
Referring to the stock market valuations, the correction initiated on the US stock markets, which is reflected to a lesser extent on other major international markets, has brought the comparison proposed by various authoritative experts back to topicality, whether in the presence of a valuation bubble similar to that of 1999/2000, as the stock market euphoria concerned Internet stocks. In fact, superficially observing the evaluation in terms of P/E of the S&P 500 index, the multiple is just under 28 which was the high at the market peak in 2000. But if you adjust this multiple in relation to the abnormal liquidity present in the system and an attempt is made to normalize the profits temporarily compromised by the reduced economic activity linked to the pandemic in progress, a P/E of between 16 and 17 is attained, which would not indicate the presence of a speculative bubble. It is also interesting to note that the correction of the major US indices currently stands at 7% from the all-time high of August, while the correction of the European and Asian indices is of a slightly lesser extent, demonstrating that the problem lies in the excessive prices reached by the tech / growth stocks, which with a weighting close to 20% of the
S & P 500 index, have contributed significantly to the appreciation of the index in recent months. From a technical point of view, the correction of this index could continue up to the 3200 level, which in any case would represent a decline of 10% from the highs, compatible with the confirmation of the positive medium-term underlying trend. This interlocutory phase is suitable for making sectoral adjustments in stock market exposure, in the sense that it is advisable to proceed in the rotation from growth sectors to the more cyclical sectors, as well as other sectors that will react positively to the expected progress that will be made by the pharmaceutical research laboratories in relation the development of one or more vaccines capable of counteracting the spread of the virus.
Nicola Bravetti Data Source: Bloomberg
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