March 10, 2010
A BROADER ARRAY OF RISKS & OPPORTUNITIES IN GLOBAL EQUITIES
The global equity market has cast a long influence on regional stock markets in recent years. Whether it was a bull market on steroids or the opposite effect, the gravitational pull of a broad-minded definition of the world’s equity market has been a major force in moving narrower slices of stocks. Is the long shadow of equity beta now in the process of transition? It’s a little easier to answer “yes” if we consider year-to-date total returns for the primary equity regions around the world.
As our chart below shows, performance so far in 2010 is a mixed bag. The developed markets in Asia and the U.S. are leading the performance race through March 9 with gains of roughly 3.5% each. At the losing end is Europe with a 3.5% loss.
It’s too soon to draw final conclusions, but so far at least there’s reason to wonder if a broader array of risk and return profiles are coming in stock markets across the globe. Such a future isn’t hard to rationalize if consider what appears to be shaping up as relatively divergent economic and financial futures depending on the corner of the world under discussion.
As the IMF recently reported in its latest economic outlook for the global economy, “growth performance is expected to vary considerably across countries and regions, reflecting different initial conditions, external shocks, and policy responses.” The report goes on to explain,
For instance, key emerging economies in Asia are leading the global recovery. A few advanced European economies and a number of economies in central and eastern Europe and the Commonwealth of Independent States are lagging behind. The rebound of commodity prices is helping support growth in commodity producers in all regions. Many developing countries in sub-Saharan Africa that experienced only a mild slowdown in 2009 are well placed to recover in 2010. Growth paths are diverse for advanced economies as well.
Is this something different from the usual variation? Indeed, there’s always a rainbow of results. It’s a big world, after all, and everything from central bank policy to tax rates to managing and regulating the marketplace differs. But those factors, and more, are arguably in overdrive these days and will remain so in the years ahead. One reason is that the policy responses to the global recession will vary to a wider degree over time. That’s not obvious based on the recent past, when the common theme has been a relatively coordinated policy response of rapidly lowering interest rates over a short period.
But while everyone was doing something similar in 2008 and 2009, it’s not unreasonable to wonder if a more varied mix of exit policies awaits. Economic conditions are likely to evolve in dramatically different ways for the foreseeable future. Divergence is already beginning to emerge. In Australia, for instance, the central bank has been raising interest rates since mid-2009 as the economy recovers at a relatively rapid pace compared with other industrialized nations. By comparison, U.S. monetary policy is expected to remain unchanged deep into 2010.
Meanwhile, there’s a substantial degree of difference in the debt structure around the world. Almost every country borrowed money to fund the liquidity injections, but the blowback from the red ink hasn’t been far from uniform. Britain, for instance, has will have an estimated fiscal deficit that’s more than twice as large (measured in relative terms against GDP) compared to Germany this year, according to a recently study published by Bank for International Settlements. Meanwhile, China’s fiscal red ink is expected to be just one-fifth of India’s for 2010.
One implication from all this is that if the global equity market delivers modest results in the years ahead, as some strategists predict, that relatively calm and mediocre exterior may hide a comparatively wider array of returns and risks bubbling on a regional and national basis. In turn, that means that there are greater opportunities for dynamically managing asset allocation. It also means that volatility and hazards are higher.
A more diverse world of equity results may be coming, but there’s still no free lunch on the menu.
Posted by jp at March 10, 2010 10:48 AM
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