Global Investment tracker Mar22 update

Economic Activity stumbles, Markets follow

This was bound to happen sooner or later – global equity share market performance tanked in 1Q22 led by US/ EU/ China – UK the only large market to report modest gains. EU was always vulnerable given the ensuing energy crisis. It was further joined by the Russia-Ukraine war (no ceasefire still… Hysteresis) and China Covid lockdown (temporary). US continues to be strong but for how long can world markets be the one-trick pony. Rising inflation and interest rate continue to be headwinds for US – expect a slowdown soon enough. Among other major economies, Japan struggles but India, UK are doing well. Yet after China in 2H20 and US in 2021, we had hoped EU et al to keep the fun going in 2022. After the sharp recovery from Covid recession, we are now in the more normal middle game. Our market bias remains towards the US and India – should we even keep EU on the watchlist? What are the leading indicators (PMI) saying – (1) Services are keeping the global economic engine humming now and not Manufacturing. (2) US continues to be amazingly strong but for how long – expect a slowdown. (3) EU is already seeing slowdown for obvious reasons. (4) China is horrible and will see a cyclical recovery in 2Q22-3Q22 (notably Services). (5) Japan continues to disappoint. (6) India is solid but not strong. UK is exceptionally strong giving company to US. But can India/ UK pull up the whole world? NO. Stay Safe.

References (writeups in the series) :
https://determinedinvest.wordpress.com/2022/04/01/hysteresis/
https://determinedinvest.wordpress.com/2022/03/15/whither-china-mar22-update/
https://determinedinvest.wordpress.com/2022/01/09/global-investment-tracker-dec21-update/
https://determinedinvest.wordpress.com/2021/10/09/global-investment-tracker-sep21-update/
https://determinedinvest.wordpress.com/2021/06/13/global-economic-tracker-june21-update/
https://determinedinvest.wordpress.com/2021/03/15/global-investment-tracker-mar21-update/
https://determinedinvest.wordpress.com/2020/09/14/global-investment-in-times-of-crisis/

• Global Investment tracker – the everything decline. This was bound to happen. Barring China (that too only in 2H21), the global markets have risen sharply together throughout 2H20-2021, despite fairly uneven economic activity. This uptrend was driven primarily by easy money (DM fiscal stimulus, global monetary stimulus), was going to come to an end eventually. The only question was triggers. Extremely elevated levels of DM Inflation (US/ EU) provided one context in 2H21 – but not enough. The EU energy crisis, China-led Covid lockdowns and the Russia-Ukraine was have provided the real triggers in 1Q22. Just like the coordinated uptrend, it was a coordinated decline in this quarter. In fact, you didnt even need weakness in economic activity – US market decline is despite a strong economy, easy money conditions and not much exposure to Russia, but the threat of rising interest rates (in 2Q22) to control its unbridled inflation (not a bad problem to have right now). This is our domain – finding the market drivers at play, which may be separate from economic drivers. EU could have been much worse with its Energy crisis exacerbated by the Russia-Ukraine war. China got the most attention, despite CCP commitments to do more to support the economy. India economy is still solid, but market weak given the high bar from 2020-21. UK is accompanying US in terms of economic strength and market strength being driven by the low base.

• Global economic activity – waning momentum in 1H22. We focus on the bottom-half of Figure 2, which presents 2021 economic growth over 2019 (pre-Covid). 4Q21 first – very good. US accelerated, China recovered from 3Q21 weakness. India accelerated. EU, Japan, UK all continued on their recovery path. Yet this is where the good news ends. EU first. Already facing an energy crisis that started in 3Q21. Weak renewable energy production, low NatGas inventories and geopolitical tensions vs Russia were already present. The Russia-Ukraine war was added on top in 1Q22. This implies the Energy crisis has transformed into a Commodities/ broader Inflation shock, which is going to last much longer (2-3 years) as EU is committed to reducing its dependence on Russia. China second. A lot of its wounds are self-inflicted given Old Economy (Real Estate) and New Economy/ Tech reforms. Yet we now realize that Real Estate reforms would have been required anyways. Yet China probably did not realize the large cost of these reforms – until 1Q22, when both the CCP and PBC (People’s Bank of China) committed to greater economic support. But before this support could have any impact, came the Omicron wave and strict Covid lockdowns (even now cities totaling 50+mn population are affected). Yet this is a temporary and China will likely witness a cyclical recovery in late-2Q22 or 3Q22 – but structural issues dont go away. Then US. Really the only large economic block firing on all cylinders. Yet it has been firing for so long now than momentum may start to flag some time – Inflation levels in US are outlandish (40-year highs !) and US Fed poised to raise interest rates 1+pc in 2Q22. Among other major economies, Japan struggles but India/ UK are doing well – yet even together they cannot negate the struggles of EU/ China. For how long can the global economy be a one-trick pony (US)?

• Global Composite PMIs – weakening. Global Composite PMIs have weakened in 1Q22 over 4Q21, notably led by China. As we have discussed in the past also, rising composite PMIs or stable PMIs (above 55 levels) are particularly good for the markets. Clearly we were in and around that area in 4Q21 but nowhere close anymore. Global composite PMIs peaked at around 58-levels in mid-2021 and have been in decline since (of course such trends are never secular one-way but always cyclical up-and-down). US continues to report consistent strong PMIs but we continue to wonder how long will the trend continue. Coming out of the Covid lockdowns, China led the recovery in 2H20 followed by US throughout 2021 – it was hoped EU will keep the fun going in 2022 but that is not to be. This is being reflected in +ve (>50) but moderate PMIs (note the low base of economic activity in 2021). China is the key driver of the drag in global PMIs in Mar22 led by Omicron lockdowns. This is going to be temporary (maybe another 1-2 months) and China will come back soon enough. Yet the structural issues around China (Real Estate, New Age/ Tech companies) are not easily sorted. India remains solid and UK a very +ve surprise (although too small to move the global PMI). Despite China lockdowns, very clearly Services are keeping the global PMIs going. Manufacturing is beset with multiple headwinds notably supply chain issues and Inflation – the PMI data also bears this out with high and rising Input as well as Output prices. This Inflationary pressures, largely in DMs, are driving interest rates, another headwind for global markets.