We are now at Easter and the leading market, the American one, is at 1850, on the levels at the beginning of the year. There have been two attempts to surpass 1900, but they have failed, albeit narrowly. There have been two corrections, one up to 1740 in January and one towards 1800 in the last few days and now we are back to square one. The traditional increase at the beginning of the year, which often lasts until May-June, was notable for its absence. 90 percent of equity strategists cite 2014 as a fairly or very good year, but the first third, what we've seen so far, has been quite jumpy and idle.
On the other hand, the Japanese stock market, which was supposed to continue celebrating Abe's new and aggressive economic policy, is down 12 percent. Gold, which was expected to continue its terminal decline, is up 8.5 percent. Industrial metals, those that should have been affected by the crisis in China and continue to fall, are up by 3.5 percent. For their part, bonds, the intended victims of the Great Equity Swivel, offer a year-to-date return of more than three per cent in virtually all of their classes (government, corporate, emerging).
As for the emerging stock markets, which in January lost even more than 10 per cent and seemed destined for a tough bear market, it is of some comfort to note that Brazil, in euro terms, is up 3.6 per cent, while the SP 500 loses the 0.3. Another interesting case is Turkey. The country has not plunged into chaos (as feared by many) and Istanbul earns almost 7 percent in euros. Less than the new poor in the Eurozone (Portugal at 12.3, Italy at 13.5 and Slovenia at 17.5), but certainly better than thriving Germany, which loses 2.5.
These data confirm the thesis that the end of the year, the period in which everyone launches into forecasts, is the worst moment for this incautious activity. Visions of the future, in December, are essentially extrapolations of the present or, better yet, the recent past. Sometimes it works, of course, but it's always best to face reality. The reality of 2013, it should be remembered, was that of a 30 percent increase on the big stock exchanges. A phase of digestion and accommodation, after the great gallop, is only good. The same is true, seen in reverse, for assets that were too penalized in 2013, such as gold. Therefore, this first third of 2014 does not have an extrapolative nature but a compensatory and compensatory one.
The 1850 level on the SP 500 is well chosen and well defensible. Indicates a moderate overestimation when thinking abstractly. However, if it is historicized, that is, if 1850 is placed in an extraordinary context of zero interest rates and global Qe, the valuation becomes practically perfect. If we then consider that growth, after a less disappointing first quarter than expected, is already showing signs of strong acceleration, we can also say that in the short term there is room to try again, this time with success, to exceed the quota 1900. In short, while nervousness (a characteristic of the markets in recent months) is usually associated with fragility, in this case we can legitimately speak of nervousness in solidity.
The confirmation of a market that has remained anchored to sound principles comes from the selective nature of the latest correction, which invested technology and biotech, two sectors in which some companies nestle (a minority) with frankly dreamlike valuations. The severity was even excessive, because it involved healthy and low-rated stocks. There has also been fierce action against banks, punishing them for shortcomings that had already been expected and discounted for a long time. Two objections can be made to the hypothesis of a market ready to attempt new highs, one important and the other even more so.
The first is that growth will weaken in Germany and Japan in the second half of the year. In the first case it is simply a seasonal fact, in the second it is the negative effect of the VAT increase. The objection is that, at least among economists, we start from low expectations, especially in the Japanese case. To this we can add that in this quarter, in addition to America, China will also accelerate. In market psychology, America counts more than Europe and China counts more than Japan.
The second objection is that the sword of Damocles of the Ukrainian crisis hangs over everything with its possible corollary of economic sanctions and counter-sanctions up to, in the extreme case, an interruption of Russian gas supplies to Europe. What is worrying is that both Russia and the West care deeply about Ukraine, believe they are right, enjoy the support of their respective public opinion and have no intention of backing down. The two previous agreements, that of February 25 which was to give life to a broad coalition government and that reached in March between Kerry and Lavrov were immediately violated by one or both parties. In these conditions it will be difficult to re-establish a minimum of confidence after a possible third agreement.
If it is true that nobody wants to precipitate things and if it is true that the players on the field, the CIA and the Russian Gru, are highly experienced professionals, it is also true that the lively chess game underway at this moment can always degenerate . From Vietnam to Afghanistan to Iraq, the analytical prowess of the two intelligence services has left much to be desired. The hope, as far as sanctions are concerned, is that Europe is desperate not to interrupt the cyclical acceleration, while Russia cannot do without European money if it is to avoid a deep recession.
Europe needs at least two years to reconvert to gas transported by LNG tankers and Russia has to be patient just as much before diverting its sales to China. At the end of this process, Eurasian geopolitics will have profoundly changed, but for now the exchange between gas and Mercedes must continue. Sanctions only make sense when they do more damage to the opponent than to us. If the damage is even, rational opponents (such as Europe and Russia) give up.
An escalation of the clash will certainly bring damage to the markets. On the other hand, stock exchanges and bonds have already shown the propensity to put the Ukrainian question on the back burner as soon as it appears to have stabilized, albeit at growing levels of tension. And then there is always the bazooka, the strategic weapon of the European Qe. As the experience of the OMT has shown, whether they are just words or that the theoretical availability is followed by facts, the aphrodisiac works in any case. Avoiding any exaggeration, we remain overweight equities up to the 1900 level. With close attention to developments on the eastern front.
