China clearly has had a big impact over the last few months, though I put that down as the spark, not the cause for the correction. I am bearish on China, but not because of the Shanghai market correction. China's equities were not correlated with fundamentals on the way up, and so, on the way down, do not necessarily imply that the fundamentals are weakening. However, the economy is slowing, and as I have warned before, I am skeptical as to where it can settle and expect a much larger and sharper correction than most factor in.
I have been told more times than I can care to count on Worldwide Exchange that equities are attractive relative to other assets. Relative attractiveness is as well and good when there is confidence in the market. But as soon as you have a risk-off moment, then investors are quickly reminded that equities (and emerging market currencies, and commodities) are risk assets, and will not escape negativity whether yields are higher than bonds or not. Given the run over the last six years and that developed world growth is only around 1-2 percent (a level that hardly justifies the global quantitative easing programs) , means that most risk assets are not attractive in absolute terms. This summer, China sparked a re-evaluation by investors of the long-term fundamental attractiveness of the assets they were holding, and we duly saw a volatile correction.
I imagine this is not quite the full end to the post-global financial crisis bull market. There will probably another (volatile) leg to the uptrend, no doubt caused by further dovish sentiment from central bankers -- the statement from the European Central Bank's Mario Draghi last week is a good example.
But ultimately, on any long-term perspective, do we really think that growth rates of about 2 percent are enough to judge QE a success? Not for me. The fundamentals do not justify the action of the last six years. Thus the market rally we have seen is resting on either a sharp improvement in global fundamentals, or more dovish action (not just rhetoric) -- which would be increasingly ineffective as China has clearly highlighted.
With that in mind. The yield of over 2 percent on offer from the U.S. 10-Year treasury note seems quite attractive. There may well be equities available with a higher yield, and we may well be entering a period of higher interest rates in the US. But with growth still uninspiring, and yields on European and Japanese debt even lower, the US bond market offers some relative and absolute value.
Wilfred Frost is co-anchor for Worldwide Exchange. You can follow him on @WilfredFrost
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