The paradox of this summer is that whilst commentators celebrate new records for most of the benchmark indices of the US equity market most investors are uncomfortable. We think that the malaise is best understood by reference to market leadership. The leadership of US$-denominated growth assets has not only accelerated. It has also become exclusive in the sense that it is accompanied this year by the accelerated decline, and often decline in absolute terms, of its corollary, the losing investment themes of the decade. We do not think that the fall of emerging markets is complete. Europe's regional equity benchmarks are "going nowhere" whilst the markets of the EZ periphery are in deep trouble. The divergence between US equity and that of the world beyond is extraordinary. "The strong get stronger and weak get weaker" to the point of caricature. The pressure upon investors to participate in the divergence between investment winners and losers has been rising. Such divergence is familiar. This is classic late-cycle territory. The decline in market breadth world-wide this year is reminiscent of 1999-2000.
A less expensive monetary policy of key central banks is a rising risk factor for equity markets. It is not a paradox to say that deflation risk in the developed world is fading even though there is no authentic reflation. The problem is that the degree of capital subsidisation is being reduced without evidence of reflation. The consequence is asset price deflation. Our understanding is that we are witnessing since January the beginning of the end of the post-2008 investment cycle. The equity bear market has already begun in the emerging world because it is especially vulnerable to the return of credit risk. Capital preservation remains our priority for the quarter.
Author:
Thomas Neuhold
Head of Austrian Equity Research
Kepler Cheuvreux
4 September 2018
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.