- The confluence of economic reopening and still-easy monetary policies from key central banks continues to reinforce our “glass half-full” market perspective.
- Acute COVID-19 outbreaks remind us that virus risks have not completely subsided, and investors may experience heightened market volatility as the economy transitions away from reopening toward more trend growth.
- Chinese regulators’ recent actions highlight the additional policy risks investors must navigate in emerging markets, though emerging middle-class consumers’ increasing purchasing power remains an attractive longer-term investment opportunity.
After closing Monday, July 26 at a new all-time high, the S&P 500 and other major global equity markets are trading broadly lower on July 27. Investors’ wall-of-worries list includes COVID-19 case growth re-emergence and the commensurate concern about the economic recovery path and higher-than-average inflation readings that challenge the Federal Reserve’s (Fed) commitment to monetary policies that have supported the economy throughout the pandemic-induced recession and ensuing recovery.
Most recently, Chinese authorities have asserted greater regulatory control over key industries, including social media, online food delivery and for-profit education. Regulators have targeted technology companies’ potential anti-competitive practices, individuals’ data security concerns, more equitable distribution of revenues to service-level employees, and soaring education costs’ impact on family formation.
From a policy analyst’s perspective, the Chinese policymakers’ actions address some long-standing and other recently emerging imbalances as the economy recovers from COVID-19 and continues its transition from a rapidly growing to sustainable growth economy. However, from a capital market practitioner’s point of view, the collective regulatory action’s swiftness, breadth and decisiveness leave little “edge” in anticipating regulators’ next actions, and global investors are pricing in additional policy uncertainty ― or what we term a “risk premium” ― across the Chinese stock market and broadly across other emerging markets.
Rule of law is a factor investors should consider in allocating assets across the globe. In the United States, regulatory and other policy changes that impact capital markets are infrequent and often relatively well-telegraphed through election policy platforms and Congressional deliberations. The collective regulatory changes impacting high-growth, highly liquid and highly valued publicly-traded companies highlights the additional rule of law risks that investors in emerging market equities must navigate. As a result, Chinese equities have led emerging markets’ recent price declines, which has unwound all of this year’s prior gains.
While risk assets are trading lower today, we are not witnessing a broad re-pricing of risks throughout the capital markets. Even though the S&P 500 is trading modestly lower today, the domestic large-cap equity market is less than 1 percent off from yesterday’s all-time high. Nearly 25 percent of S&P 500 constituent companies have reported second quarter earnings, with results to date exceeding analysts’ consensus estimates for both revenues and earnings. Credit spreads, which measure the additional yield investors demand for investing in corporate bonds rather than U.S. Treasuries, have risen modestly this month but remain well below long-term averages, suggesting little concern yet for the economic recovery supported by ongoing Fed monetary policy. Finally, the U.S. dollar remains within the last year’s trading range, implying little urgency from investors to move money to the perceived safety of U.S. dollar-denominated assets.
Our investment outlook remains “glass half-full” regarding the forward prospects for diversified portfolios. Rising earnings, continued reopening progress and accommodative central banks support our near-term outlook. While we are attuned to recent policy actions and the ensuing capital market action, we do still see opportunities for diversified investors in the longer-term opportunities presented by emerging middle class consumers’ increasing purchasing power across Asia, Latin America and other geographies. Next up on the policy front is a regularly scheduled Federal Open Market Committee meeting tomorrow, and we will provide you with any significant developments and potential policy change signals. We continue to encourage investors to retain a multi-year, multi-cycle perspective, being mindful of recent events but focusing on two key investment horizons: The current reopening activity around the globe and countries’ variable speeds and glidepaths as they emerge and the steady state that follows and how sustainable that growth may be.
We will continue to keep you apprised as events unfold, and please do not hesitate to contact your wealth management professional if you have any questions in the current environment we can address. We thank you for your trust.