Fear

13/05/2011 at 1:43 pm 1 comment

There have been a few days recently where asset classes have behaved in an unequivocally bearish way: equities down, bonds up, commodities soft. Such movements remind us that this remains a reasonably fearful market.

There is, of course, much to be afraid of. The travails of the peripheral euro countries continue to make headlines. There have been signs that the pace of the recovery has slowed. Emerging economies have continued to pursue a programme of monetary tightening. Inflation is on the rise. And all this in the context of a year which has seen major exogenous upheaval: literally, earthquakes and revolutions. No wonder markets are anxious.

Not all of the concerns add up, however. How, for example, do fears over inflation and interest rates square with alarm over falls in the price of commodities? And is it not a little schizophrenic to blanch at the prospect of higher prices while dreading slacker demand?

Furthermore, some of these fears are demonstrably overblown. Yes, there are signs that growth has come off the boil in some economies, but that is absolutely not the same thing as renewed contraction. A “slowdown” in China, for instance, means growth of six instead of ten percent. And while some countries have raised interest rates, they remain historically low at a global level. Most developed countries still have negative real interest rates, and even in places where post-recessionary tightening began early, such as Australia or Brazil, policy rates remain low by historic standards.

Finally, some market prices are bucking valuation dynamics too. By all means fear inflation – but then why buy bonds? And while earnings growth has slowed from the breakneck pace associated with post-crisis recoveries, Bloomberg data for developed and emerging stock markets shows that reported EPS rose by over 6% during the first four months of this year – a creditable annualized rate of 19%.

Fears, of course, can turn out to be justified. But against the fundamentals as they stand, these recent bouts of funk do look rather overdone.

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  • […] As markets resume a pattern of negative behaviour that has become familiar of late, one of the reasons cited remains slowing global growth. There are fears over growth problems in […]

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