Monthly Market Report - May 2018

20th April 2018

Over the last few years, we’ve experienced what one could describe as a Goldilocks scenario, with fairly synchronised returns from most assets including individual national stockmarkets. In this ‘regime’ we see that most sectors move upwards and there isn’t much differentiation in terms of returns between different types of stocks. Now that we’re entering a new world of rising interest rates, one of the few things that we can say with some certainty is that this ‘regime’ is probably at death’s door and we’re entering into a new dynamic, a new "regime”. Put simply different financial assets – and different parts of a stock market – might move in different ways. Bhanu Baweja, Deputy Head of Macro Strategy at investment bank UBS has nicely summed up some of these divergent trends and indicators. He notes that "Stocks globally have weakened, but small caps are outperforming large caps. LIBOR-OIS is widening, as are IG spreads, but high yield credit has remained largely unscathed. The USD has failed to strengthen. EM stocks have outperformed, EM currencies are only modestly weaker, while EM fixed income is rallying hard.”

How might these varying trends resolve themselves? The optimists suggest that sooner rather than later we’ll reach the top of the current interest rate cycle and then as interest rate rises stop, we’ll probably head back into slightly more synchronised global markets. Their argument – one which I largely agree with – is that interest rates can’t go too much higher for one very simple reason…there’s too much debt swirling around the global system. One stat sums it all up very nicely - there has been a 45% increase in global indebtedness since 2008. Some $75tn (75,000,000,000,000) of new debt has been created and much of this might default if interest rates were to rise too sharply.

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