Fasten your seat belts! Trump’s trade war may put brakes on 8-year global rally

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NEW DELHI: Protectionist policies could be the biggest catalyst that may trigger an end to the 8-year global equity bull market, BofA-ML’s latest monthly survey of 175 global chief investment officers and portfolio managers holding a mind-blowing $543 billion in assets suggested. (See Table)

Twenty eight per cent of the respondents in the survey felt that higher interest rates could put bears on top. The report noted that a more hawkish Fed Chair Janet Yellen at Humphrey Hawkins’ testimony could provide an upside catalyst for dollar, given the dovish market-pricing of rate hikes, but was quick to note that consensus strong-dollar view was faltering at margin in February and EM equities finding some favour with global funds.

A net 28 per cent of the respondents believe that the dollar was overvalued, which is the highest percentage since September 2006.

With US stocks hitting record highs each passing day, 78 per cent of the respondent felt that US equities is overvalued and the US dollar was the most over-crowded space. (See table)

This is in contrast with 49 per cent of the respondents who believe EM equities were undervalued; 24 per cent felt euro zone stocks too were undervalued.

The survey suggested that funds EM equities improves to net 5 per cent overweight in February from net 6 per cent underweight in January. This is the biggest month-on-month jump in 11 months.

That said EM equities still remained a contrarian, with relative EMs vs DM positioning improving to minus 14 percentage points from minus 23 percentage points last month.

That said Bofa-ML’s Global FMS Macro Indicator is in buy territory as ‘FMS Macro’ indicator has been trending higher for the past 7 months and cash level is higher than it was two months ago.

“This is a bullish combo for risk assets because investors have been reluctant to deploy cash even though FMS Macro is positive and clearly on the upswing,” the foreign investment bank said.

For Bofa-ML’s buy signals, the median return for global equities would have been 4.5 per cent over the subsequent three month with a hit-rate of 79 per cent.