Global equities at a crossroads: Slump or bump?

Was last week’s slump in global equity markets a harbinger of more declines to come? Or a temporary bump along the road to further stock markets growth?
The recovery on Wall Street late last Friday dispelled some of the gloom that had fallen over global equities all week, led downward by US markets and (mainly) American concerns on interest rates and technology stocks. As ever, when America sneezes, the rest of the world catches a cold.
But for the emerging markets, equities have been showing symptoms of infection for much of the year. The MSCI EM index has shed 12.62 percent over the past year, with the decline accelerating over the summer months.
With China by far the most important constituent of this index, which will include Saudi Arabia next year, most of that decline has reflected a wide range of investor concerns about the country — its lower economic growth prospects, worries about the extent of hidden debts within the financial system, and the threat to its exports of a trade war with the US.
On their own, these worries would have been enough to drag down emerging market indices across the board.
Economic growth is actually an issue for most of the world outside the US, and India among the EM economies. The other big trading block, Europe, has experienced falling business confidence and slowing exports. The IMF has cut its growth forecasts for most countries this year and next.
The other big factor in the global equity sell-off has been the rise in bond yields, fueled by rising economic optimism in the US and expected further increases in Federal Reserve interest rates. The 10-year Treasury bill yield recently leapt to a seven-year high, reflecting equity market volatility.
Other factors were also in evidence in last week’s slump, such as the increasing use of instruments linked to stock market volatility, which tend to exaggerate market movements up or down, and computer-directed investment strategies — familiar culprits — which panic traders into following a downward movement.

However, these “technical” factors can only come to bear when there is substantive cause for concern in the real investment world. What appears to have particularly spooked investors are two things, both American in origin and effect: Technology valuations, and concerns over future monetary policy.
President Donald Trump liked to claim the credit for the stock market rise that has, in fact, been underway since the end of the global financial crisis in 2009, but the real reason for the long boom in US equities was the apparently inexhaustible strength of the US technology sector.
The “FAANGs” — the high-tech stocks roughly comprising Facebook, Apple, Amazon, Netflix and Google — have been responsible for as much as half the increase in US equities over that period, sometimes more. Their valuations have soared to almost “bubble” status, and it does not take an investment guru to see that if some of that froth disappears, the whole market will head downward.
This is a big factor behind he recent falls: The high-tech stocks, for which it was thought there was a “new paradigm” or investment model, have proved to be subject to the same old laws of supply and demand as any other sector.
Some experts, like those at Goldman Sachs, believe that there is still plenty of increased value to be had in tech stocks; others, like Morgan Stanley, think many are approaching bubble territory. The next few months will decide which is correct.
We will also see who turns out to be right between Trump and Jay Powell, the relatively new chairman of the Federal Reserve. Powell has stuck to long-running Fed policy to pull back from quantitative easing by gradually increasing interest rates. Trump, who did a lot to heat up markets with his tax cuts, thinks this is “loco.”
In the midst of all this, there are serious geopolitical risks overhanging the financial world: New sanctions on Iran oil exports next month; the increasing risk of a no-deal Brexit for the UK; the possibility of further deterioration in the trading relationship between the two biggest economies in the world; and rising political volatility in the US after the mid-term congressional elections next month.
Most Middle East markets — driven by their own concerns and issues — did not reflect the Friday bounce on Wall Street. The direction Asian markets take at the beginning of their trading week will give us a better idea of whether last week was a blip, or a taste of what is to come.

From: Arabnews