The global stock market has been on a huge winning run since the lows of 2009, propped up by low interest rates and high corporate profits.
Stocks have surged 30% globally since 2011, according to the analysts at HSBC, adding $US14 trillion (£9 trillion) to the value of shares. And that’s with the market volatility in China seen since May this year.
So what happens when the US finally decides to start raising rates?
Logic would suggest that the heat will come out of stocks, leading to price falls. But HSBC’s equity strategists led by Ben Laidler analysed past rate hikes and found that US stocks may fall but the global market keeps growing.
Here’s Laidler (emphasis ours):
We have identified four instances historically where US equities have declined for a prolonged period, but the rest of the world has seen positive returns: 1976-77, 1980-81, 1983-84, and 1993-94. A key similarity between these periods and today is diverging regional monetary policy, with the US beginning to tighten, but other central banks keeping policy loose.
And here’s what that looks like:
The key point to make is that the rest of world “can perform” as long as other central banks don’t follow the US into a monetary policy tightening cycle, where interest rates are gradually stepped up over time.
So, stocks ouside of the US are protected as long as the US Federal Reserve doesn’t influence the thinking of other key central bankers such as Mark Carney at the Bank of England and Mario Draghi at the European Central Bank.
If that happens, HSBC expects “a 4% global equity capital gain into year-end.”
Long live the market rally.
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