Home » Investors Should Worry About Liquidity, Not Growth – FT中文网

Investors Should Worry About Liquidity, Not Growth – FT中文网

by admin
Investors Should Worry About Liquidity, Not Growth – FT中文网

Reminder from FTChinese.com: If you are interested in the content of FTChinese.com, please search for “FTChinese.com” in the Apple App Store or Huawei App Store, download the official app of FTChinese.com, and pay for subscription. Happy using!

The author is chief investment strategist at UBS Investment Bank

On Google Trends, U.S. searches for the term “recession” have risen to near-coronavirus highs, reflecting its centrality to the investor narrative.

However, the market did not factor in the recession in pricing. Stocks in small companies have traditionally been sensitive to economic downturns, but in the vast majority of regions, they have recently performed in line with, rather than far below, stocks of larger companies.

Likewise, speculative-grade bonds typically fall in recessions, and their spreads over benchmark government bonds rise sharply to compensate investors for the rising risk they take. But compared with investment-grade bonds, that spread is now at mid-range, not high.

Cyclical currencies such as the Australian dollar and South Korean won were relatively muted. And expectations for the maximum interest rate level for most central banks are being raised.

If we look at signals in areas such as stocks, interest rates, credit, commodities, and exchange rates, the market as a whole is pricing in a global growth rate of 3.2%. This is slightly below the global long-term average growth rate of 3.5%, but not a recession.

If weaker data increases the likelihood of a recession, there are downside risks to the market. Just how big the risk is depends on the likely depth of the recession. Of the 17 recessions the U.S. has experienced in the past 100 years, 7 were deep recessions, with peak-to-trough declines in gross domestic product (GDP) of more than 3%; 10 were mild recessions, with smaller declines in GDP .

See also  Deeply unite with Ali's every flat and every house to upgrade the digitalization of the home furnishing industry_Decoration_设计家_平台

During a deep U.S. recession, the time-weighted average decline for the S&P 500 was about 34%. That compares with a typical decline of just 11% in a mild recession.

If the U.S. economy experiences a recession in the next two years, it should be a mild one. Strong consumer and bank balance sheets should withstand the effects of the initial economic shock.

Some worry that high inflation and rising policy rates will increase the chances of the economy falling into a deep recession. Historical experience shows that this is not the case. Over the past century, inflation has averaged 6.6% before mild recessions and 2.6% before deep recessions. The Federal Reserve’s average policy rate was 8.1% before the mild recession and 4.6% before the deep recession. High inflation or tightening policies do not automatically trigger a deep recession.

If the next recession in advanced economies is going to be mild, and markets are already down more than 20%, how can a recession not yet be priced in?

It is important to recognize the real drivers of the market. Our model shows that since the stock market bottomed in March 2020, liquidity has had a 2 to 2.5 times greater impact on the rise and fall of returns than economic growth. The real yield on the 10-year U.S. Treasury note rose 1.9 percentage points from November 2021, when financial conditions were at their loosest. At the same time, stock market returns have been lowered due to falling valuation multiples.

Take, for example, the market benchmark invented by economist Robert Shiller, the cyclically adjusted price-to-earnings ratio (CAPE) for the S&P 500. CAPE compares the stock price to the average EPS over the past 10 years. The S&P 500’s CAPE has fallen from 38.5 to 28.7, but it remains high compared to the pre-mild and deep recession averages of the past century — 14 and 23, respectively. High inflation and high interest rates by themselves may not cause a deep recession, but they can cause valuation multiples to drop significantly.

See also  Pd, Mirabelli: "Electoral defeat? Elly Schlein is not to blame"

Much still depends on the inflation outlook. UBS is bullish on inflation, forecasting inflation in the U.S. and Europe to fall back below 2.5% over the medium term as supply bottlenecks ease.

However, even if this materializes, U.S. and global equity returns are unlikely to come close to the 10.3% and 7.5% annualized levels of the past decade.

The shift in liquidity from central bank generosity to central bank monetary tightening, and the cheapening of bonds relative to stocks, all point to an annualized return of 5 to 6 percent for stocks over the next five to 10 years. Again, provided the Inflation Servant can be put back in the bottle.

Supply chain changes, increased geopolitical competition and climate change regulation could push inflation higher than we expect. In the medium term, U.S. headline inflation is likely to hit 3% to 3.5%.

This has historically forced central banks to tighten liquidity to levels tight enough to push the S&P 500’s CAPE to around 20x to 22x. If that’s the case, the stock market would need to drop a further 20% to 25% to reach that level. This is a significant decline, even if the associated recession is not severe.

Translator/He Li

You may also like

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Privacy & Cookies Policy