The S&P 500 index recently hit new all-time highs: for some experts we are in the strongest bull market since the end of the Second World War. In Europe, signs of recovery, with economic indicators better than expected, are driving investors to sell safe-haven securities. Result: in the last week, ten-year German government bonds increased their yield by 0,16% paying 1,68% with the spread with the ten-year BTP which fell to 272 points. But, as the IMF led by Christine Lagarde pointed out this week, the situation remains fragile and there remains a "high risk of stagnation", especially in the periphery: we are emerging from degrowth but we still have to take the path of growth. The spotlights are still on China after the confirmation of the slowdown in GDP and the Government's assurance that growth below 7% will not be allowed. During the week Beijing launched new measures to support the economy such as the elimination of taxes on small businesses and the reduction of costs for exporters. Meanwhile in Japan, Abenomics seems to be working (even the latest June inflation data indicated 0,4% year-on-year growth, exceeding analysts' expectations and in line with the anti-deflation policy pursued by the Government) even if there were shocks on the Tokyo Stock Exchange (only on Friday the Nikkei collapsed by 3% penalized by the rise in the yen and by disappointing new quarterly results after those announced the previous day by Canon).
In this context, uncertainty remains high on several fronts. Will the recovery in the US strengthen or is it destined to remain tepid for a long time? When will Ben Bernanke start tapering? Will Europe be able to stably take the path of growth through structural reforms? While some emerging countries such as Brazil are lagging behind, can China still be the engine of world growth? In short, if in the short term investors have shown optimism in the wake of the reassurance in Europe and positive macro and quarterly results, will the trend continue?
For Alessandro Fugnoli, strategist at Kairos Partners and author of the newsletter Il Rosso e il Nero, the new equity highs are the result of the Fed's introduction of tapering like a bolt from the blue (which convinced the market to sell any asset , good and less good) and its subsequent retraction. This has generated a shift in the balance of power between the Fed and the markets. “The Fed has lost credibility and the markets feel more invulnerable – he explains in his latest newsletter published on Thursday – Now the Fed will remain silent for some time. He will meditate, study the data and not tell what he thinks until September. With the decisive FOMC on September 17 approaching, the market will become nervous again and its sense of invulnerability will diminish”.
Fugnoli believes that two things should be considered probable: 1) the stock exchanges, at the end of the year, will be at a higher level than at present; 2) between now and the end of the year, there will be times when the markets will be lower than now. "On this hypothesis - Fugnoli then specified - it would therefore be appropriate to slightly reduce the share positions in order to be able to take advantage of less brilliant phases between now and the autumn".
Among the Stock Exchanges, Japan is to be preferred. Europe, underweight in global portfolios, she says, can do better than America if it can confirm the signs of stabilisation. "However," Fugnoli says, "it's an eminently speculative investment." The strategist then remains neutral on bonds in the short term and suggests accumulating dollars calmly and only in phases of weakness such as the current one.
Conclusions that are based on the analysis of the situation in the three corners of the globe following the maxim "humans love to create problems when there are none and tend to try to solve them when there are". Thus he challenges the widespread perception that it seems that America has no problems, China has serious ones and Europe is on the right path to alleviate its burdens. Let's see what the reflections are for each of these areas.
United States
At the moment the USA is benefiting from a small acceleration from inventories which, starting at the end of June, will have, according to Fugnoli, "a greater acceleration at the beginning of 2014 due to the disappearance of the restrictive fiscal effects which are weighing on 2013". But on the horizon there are new political scuffles. “Seeing, however, that Obama is preparing to tour the country to show off the improvements in the economy – explains Fugnoli – the Republicans have made it clear that they will withdraw the issue of budget cuts. Fiscal peace, one of the pillars on which the historical high of the stock market is being held, could therefore be called into question". If for the moment the republican action seems above all disturbing, for the strategist it is still something to keep an eye on.
China
"China, which is full of problems, on the other hand has the desire to face them" Fugnoli begins on the country, explaining that the problem is not the 7.5 percent growth rather than 7.2 or 7.0, but the country's development model which faces a radical rethink, a topic on which the debate has been going on for more than a year. Think of the expansion of credit, very useful in the past, which is starting to be a policy to be used in times of emergency or the degraded environment which will put a stop to the diffusion of cars, which have made a significant contribution to growth in recent months . All eyes are on the economic conference in October. "At the moment - says Fugnoli - everything suggests that privatization and liberalization will be the main course".
Europe
“The positive difference compared to China – says Fugnoli – is that the European macro picture appears to be stabilising. The difference for the worse is that it is not known how much desire there is to address the structural problems. And we know that structural problems, precisely because they are such, never go away by themselves”. Everyone's eyes, including the markets, are thus on the evening of 22 September, when the outcome of the German elections will be known. This will allow you to get an idea of how the European strategy will be set up. Southern European countries (right and left together) – continues Fugnoli – the United States and the markets hope that Merkel will come out weakened. A simplified scheme is used according to which a strong Merkel means austerity and risks for the euro and for the world economy, while a weak Merkel equals European public spending and salvation for the euro and for the world”. However, warns the strategist, things are not so simple. Because this approach, which puts Merkel at the centre, overlooks the lively ongoing debate on the euro on the German left, accustomed as we are to thinking that the German left has always wanted the euro with enthusiasm.
