The Financial markets are living in a world of extremes and after the worst December since 1931 we had the strongest momentum rally in 40 years in January with a…This content is for Research, Model Portfolio + Investment Ideas, 1-month Free Trial and Diamond Membership members only. Log In Get a 1-month Free Trial
Equities A sea of red and the worst week in global equities since 2016, but this is only a warning shot … Over the past few weeks we have been…This content is for Research, Model Portfolio + Investment Ideas, 1-month Free Trial and Diamond Membership members only. Log In Get a 1-month Free Trial
Back in August 2018, we sold all our positions in Indian equities as we were worried about higher interest rates and the overvaluation of the Indian stock market.
The Indian Rupee had started depreciating since January 2018 losing almost 18 % of it value this year. India’s inflation has been rising towards the 4 % markets, forcing the Central Bank to raise interest rates and we see the currency move as having now ended.
Last week, as US equity markets were making new all-time highs and emerging markets were rebounding we flashed an orange warning signal.
The weak internal dynamics of US equities, the unusual rise in bonds yields and equity markets at the same time, the loss of leadership of the tech sector and hyper speculative nature of the markets were all elements that triggered warning bells for us.
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TRADE WARS, THE TRUMP METHOD AND LIQUIDITY
Equity Markets rose sharply last week as economic indicators and the heightened trade war led investors to conclude that the world economy would slow down marginally in the next six months while the ongoing trade wars would only have a limited systemic impact.
As our readers know, we had been anticipating a break-down in the US equity market as liquidity conditions were tightening but the behavior of the bond market and the flat-to-inverted yield curve is creating an environment of marginally negative real interest rates that remains supportive of equities for now.
In other words, liquidity is clearly prevailing over trade wars for now, and the correction of the first half of the year may be over.
From a fundamental standpoint, what it really means is that as long as bond markets do not break down or the yield curve slope up sharply, monetary conditions will remain. favorable to global equities and emerging markets in particular.