Is the glass half full or half empty for global equities?
23-05-2022
George Lucas, Raiz Group CEO
The MSCI world index of equities, which tracks shares in 50 countries, fell more than 1.5 per cent last week. It has now fallen more than 5 per cent in May and more than 18 per cent since a peak in early January, making it the index’s longest losing streak since its establishment in 2001.
Looking at equities, the glass-half-full case for what’s going on is that markets have already fallen a long way, so they now have plenty of upside if the global economy doesn’t head into a full blown recession.
The slump this year has mainly reflected an unwinding of lofty valuations of tech and new economy stocks in the face of turmoil in the bond market. The fall in the markets have not been driven by concerns about the global growth outlook, with a global recession risk only being talked of recently.
However, in my view last week’s falls in global equities is due to growing concerns about growth and corporate earnings rather than rising interest rates. That’s evidenced by the fact that the falls were triggered by potentially shrinking margins at a couple of large multinational US companies.
Talk of global recession on the rise
Digging deeper, the IMF and World Bank prefer to characterise a global recession as a year in which the average global citizen experiences a drop in real income. They point to 1975, 1982, 1991, 2009 and 2020 as years of the preceding five global recessions.
Assessing the current environment, the IMF’s official global growth forecasts for 2022 still seem far off its definition, with the organisation in April expecting annual growth of 3.6 per cent this year.
Even so, some pundits believe the environment has deteriorated since the IMF forecast, lowering the growth projection to just 0.5 per cent in 2022 and stoking talk about a possible global recession.
Adding to pessimism about global growth are continued COVID-19 lockdowns in China, rising interest rates in the US, and large cost of living increases in Europe. There’s also the disturbing situation in some poor emerging economies of food shortages leading to famines.
While the majority view among economists is still that defences against a global recession will win in 2022 and we will not see one, more economists are hedging their bets due to ongoing bad news.
Australia wage growth likely to accelerate
In Australia, we saw the pace of quarterly wage growth was unchanged in Q1. On the back of this, the Reserve Bank of Australia probably won’t need to accelerate its rate hike cycle. Still, with the labour market tightening and inflation rising, wage growth will likely accelerate later this year.
Meanwhile, the unemployment rate held steady at a 48-year low of 3.9 per cent in April, despite job growth coming to a near-halt with only around 4,000 new jobs created in the month.
Indonesia interest rate rise on the cards
Elsewhere, there was a surprise rise in interest rates in Malaysia and I believe that this week Bank Indonesia will likely follow suit, hiking rates 25 basis points to 3.75 per cent.
In Thailand, GDP grew by 1.1 per cent in Q1 compared to the previous quarter. Looking ahead, recovery will largely depend on how quickly tourists return now borders are open to foreign visitors.
On this front, COVID-19 restrictions on places of entertainment are being reduced as of 1 June and the Thai Pass rules will be relaxed, making it easier for foreigners to visit Thailand.
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