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About diverging equity markets

The US market is the only region in the world where the performance since the beginning of the year is positive (MSCI USA + 8.8%, Europe -3.6%, Japan -6.5%, Emerging markets -6.6%) . The European and Japanese markets are going nowhere, while Emerging markets are clearly on a downtrend.

An outperformance of the US market is perfectly justified given the superiority of growth in US profits (+ 23% in 2018 and + 11% in 2019 according to IBES, against + 9% for the 2 years in Europe for example). But a “divergence” goes beyond and must challenge.

Indeed, there are two ways to get out of it:

  1. the US market is in turn subject to some profit taking; the context is indeed the rise of global risks (US elections approaching, trade war, budget negotiations in Europe, especially in Italy, rising oil prices, 'idiosyncratic' risks in emerging countries). In this case, it would be a profit-taking process where capital gains are obvious, and would also concern growth stocks. The uncertainty surrounding the US election could then serve as a pretext,
  2. the other possibility, more positive, would be that the other markets join the uptrend of the US market. For this, on the contrary, it would be necessary to lift the same risks, even partially. Here too, the American elections can serve as a point of reference; by that time, we should see more clearly about Italy's budget options. China is also starting to move the sliders with more support for its economy. If this support becomes more visible, it could contribute to a return of risk taking on the markets.

Obviously there is a third way, which consists of a mix the first two. As the arguments between these two issues do not go in the same direction, one could imagine that Scenarios 1 and 2 follow one another.

Beyond the path that could take the re-correlation of major equity markets in the world, and it must be admitted, which remains difficult to predict, this suggests that counter-trend movements could surge. Thus, some caution is needed; simply following current trends by the end of the year could prove to be a dangerous game.

 

2018-09-14 - About diverging equity markets
MIJOT Eric , Equity Strategy
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About diverging equity markets
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