More difficult times ahead (unless you are chinese or british)?
30th April data from our friends at CrossBorder Capital confirms the much bleaker liquidity picture ahead, which we alerted you to a month ago. While the index at 29.8 overall was slightly higher than March, the composition was worrying. There is a very high level of risk appetite (ie. investors’ exposure to riskier assets compared to ‘safe’ ones) in Developed Markets, which has historically been a reliable predictor of bear markets. Central banks, with one exception (below), continue to try to wind down the optimism by tightening monetary policy. Private sector credit creation remains subdued, especially in the US and Japan. CrossBorder’s interpretation of this is a high likelihood of a bear market in DM equities within 9-12 months and an economic slowdown to follow.
The UK stands out like a sore thumb, however. Liquidity here is the highest of all the major economies, partly because of ultra-strong cross-border flows. The explanation may be that the Bank of England is maintaining a looser stance because of political fragility or that overseas investors have more confidence in the UK than we do. If you believe the data - however unfashionable a view it may be - the UK economy is relatively well placed going forward and sterling should not weaken greatly.
The other clear trend, which we have mentioned before, is the growing divide between Emerging Markets, largely driven by China (a mostly positive liquidity background with low investor sentiment), and the major economies and markets (the reverse).
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