Revisiting the underlying market trends

Mikio Kumada, global strategist at LGT Capital Partners analyses the global trends underlying recent market volatility. 

We start our comprehensive quarterly asset allocation review next week, which involves rating global economic trends and asset valuations, as well as a multitude of market information-based assessments. This proven process has helped us secure long-term performance for our multi-asset funds, with a controlled level of volatility. Today, we highlight the existing longer-term trends in major equity markets, in order to provide important context ahead of that review.

Firstly, we need to highlight the most important potential consequence of last month’s China-induced volatility shock: the global equity indices have indeed lost significant upside momentum, and it may take some time until the situation stabilizes again.

However, to strike a more positive note, much will depend on the “technical” quality of the ongoing stock market rebound. Luckily, the first signs are encouraging, suggesting that the bullish regime forces will strike back and prevail again, at least in the developed markets. The underlying weakness is mainly limited to the emerging markets

At this point, it is worth noting that by “global equities” we mean the MSCI All-Country World Index (ACWI) in US dollar, which includes all the emerging economies. In terms of their market capitalization, this group of markets represents roughly 15% of the ACWI’s total. Including the highly-correlated developed markets of the MSIC All-Country Asia-Pacific excluding Japan Index (APXJ), such as Australia or Singapore, their weight rises to about 20%.

In other words, shares of companies from the Emerging Markets and APXJ, after taking overlaps into account, represent about 36% of the non-US securities in the index, which is significant. Getting back to global level, the key point is that the ACWI is now trading at broadly the same level as in early 2014, and it might take several months before it can reclaim the May 2015 high.

Per se, that does not mean that the bull market is ending – perfectly healthy bull markets can go through relatively long “sideways” phases – as was the case from summer 2011 to spring 2013. This is something that we need to keep in mind. Relative strength of developed markets remains robust That said, secondly, we also need to add that the underlying longer-term global uptrend still remains unbroken, owing to the relative strength of the developed equity markets – i.e. Japan, Europe and – to only a modestly lesser degree – the US.

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