Portfolio Manager, Peter Brooke, discusses the host of recent good news to come out of the three main global blocs – the US, China and Europe – which has catalysed a strong risk-on rally.
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Peter Brooke 00:00
Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 46 of 2022, and I want to talk about the recent rally in global equity markets.
Peter Brooke 00:12
There's been a host of good news out of the three main global blocks: China, Europe, and the United States, which has catalyzed a strong risk-on rally.
In China, there've been some massive up days, driven by rumors of an easing in their Covid zero policy. Quite frankly, I don't know what they're doing there. And I find it hard to understand what's going on. But what I am sure about is that if you look forward into 2023, there's lots of room for upside. Better drugs, better policy, and better year-on-year comparisons will make for an easy improvement. There's also been some meaningful relaxation of the pressure on the property developers. Where the banks are allowed to roll out the debt for an extra time period. And then finally, at the fringes, the meeting between Biden and Xi reduces some of the downside risk of superpower conflict. We're not surprised that things look a little bit better out of China, partially because it's so bad at the moment. And as a result, we have some direct China equity exposure in our solutions through the ASEAN market. And we have been buyers of Naspers at much lower levels.
Peter Brooke 01:27
In terms of Europe, the really big issue is energy supply and the price of energy. With gas storage full, lower prices, and the Russian/Ukraine war gone into winter slow down, the news out of Europe is definitely better. Which has allowed European equities to outperform global equity markets recently.
Peter Brooke 01:48
Then finally, we've got the US, where equity markets have responded very positively to lower than expected inflation, with the NASDAQ jumping 7.3% in a day last week. This one I find slightly trickier. The results season wasn't great. And sure, the US inflation at 7.7 was better than expectations of 8%. But it's hardly a convincing victory. To be clear, we believe us inflation has peaked and will fall sharply. But it's important to realize that it has to, because it's at 7.7, whereas the target is at 2%. And I really think that the market's obsession with US rate policy shows how sensitive everyone is about liquidity and the impact of a rising cost of capital. And we're going to have to see what happens from here.
Peter Brooke 02:39
Some of the big gain we've seen in markets has been driven by the fact that positioning is very bearish. So, positive surprises, like we've had, cause short covering. So, we're going to wait to see what happens before believing that we're back to the Promised Land. One of the reasons for this is liquidity tightening still worries us, and we got evidence of its impact last week, where higher interest rates have claimed yet another casualty, this time with the bankruptcy of FTX, one of the largest cryptocurrency exchanges in the world. This has caused Bitcoin to full 20% in the last week, and just shows you the pressure that can come from tighter liquidity. Crypto falling isn't a particular surprise to us, but it does show that we're not out of the woods yet and there's still some risk.
Peter Brooke 03:34
I hope you enjoyed this perspective. Next week, I'm going to chat to Nicole, our Head of Stewardship, who has just come back from COP27 in Egypt, and we'll get some feedback from that. Thanks a lot, bye.