When US President Donald Trump said last Friday that he was optimistic about the prospects of reaching a trade deal with China, it offered some relief for emerging market equities.
However, sentiment again turned negative as a number of big tech stocks in the US have tumbled over 20 percent and stepped into bear market territory.
Adding to the pressure is Trump’s decision to restrict high-tech exports, a move that is believed to be aimed at China.
While the US-China trade issue will remain a key factor for the markets, let’s also take a look at cashflow patterns to see if we can find some clue as to the future direction of global equities.
Data shows that global stock markets as a whole have seen net capital inflow recently, amounting to US$75.6 billion over the last 10 weeks.
But most of the inflow went into US equities, which have reported a net inflow since the middle of May. And such flow topped US$70 billion over the last 10 weeks.
By contrast, the non-US equity markets have seen net outflow for most of the time during the period.
I believe strong earnings growth has been the key factor drawing funds into US equities.
Analysts have revised the earnings per share of the constituents of MSCI USA Index by 11 percent from the end of 2017, the strongest level in more than a decade.
In the meantime, money has been flowing out of fixed-income market. The fixed-income market has lost US$2.8 billion over last 10 weeks and has suffered the fifth straight week of net outflow.
Debt market has apparently lost its safe-haven status amid the US market sell-off since October.
This is not surprising as more and more central banks embark on a tightening cycle.
Bond king Jeffrey Gundlach believes it’s a sign that inflation is creeping up.
Suppose there is a prolonged trade war, strong earnings performances of US companies may not sustain, and the global economy could enter a contraction cycle next year. If Gundlach is right, investors should gear up for stagflation next year.
We might see market rates rising further and stock markets heading south next year, just like in the early 1980s. The right investment strategy for 2019 might be keeping more cash.
This article appeared in the Hong Kong Economic Journal on Nov 22
Translation by Julie Zhu
[Chinese version 中文版]
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