The financial market ructions of early 2016 scared global investors into bonds and away from equities. That saw almost $200 billion flow into global bonds and around $160 billion exit global stocks.
That trend has now reversed – with gusto.
Sean Darby, the Hong Kong-based chief global equity strategist for Jefferies, said in a note today that even though bond yields have found some temporary stability, investors continue to switch out of bonds (-US$8.6bn) into equities (US$5.2bn).
Naturally the US is the major beneficiary, but Darby suggests this is a global sector rotation not just a US story noting that the stock markets of Europe and Japan, along with the US are “the favoured destinations” for capital flows.
But Darby says it’s not likely to be all plain sailing for US stocks.
“As we have highlighted the S&P 500 stood to benefit from a clean sweep by Trump but the strength of the dollar will act as a brake on earnings. Similarly, higher mortgage rates will act as a ceiling on the housing market unless wages keep growing faster than inflation,” he said.
That US dollar strength is a distortion, pressuring emerging markets and causing central banks in Asia to follow the leads of Mexico and Turkey in raising rates to protect their currency.
And Darby said he’s wary that “the current shake-out in fixed income is not over”. His summation for the outlook ahead is long stocks, short bonds, and wary of emerging markets.
“If indeed the US is set for a high fiscally led policy the nominal yields ought to reflect nominal GDP, 3% plus does not appear in the price. We continue to recommend owning equities with a high correlation to US break even inflation rates. We are cautious towards EM,” he wrote.
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