Risk on hedging equities positions for long-term portfolios of investors have sharply increased along with prices.
The recent correction of 20 percent in stock prices on Shanghai stock exchange may not have indicated the stock rally’s end, but instead might serve as a warning and prediction on how the circular rebound could end within the equities markets.
The global economy’s underlying recovery has been forced back by the government fiscal and monetary input and inventory restocking. Meanwhile, risky markets of stocks, commodities and corporate debt have been aided by large amount of liquidity along the sidelines, in money market funds and bank deposits. The risk seems to have its access on the market again, with bets going to government intervention denoting deflation.
But what will happen after inventory restocking ‘mechanical business’ runs its course? The one-third decline of home price average and the 10 percent employment weakened and frightened the US consumers. There must be critical questions over the US consumers’ ability to sustain economic recovery in addition to inventory restocking.
Events that happened 12 months ago was tagged as ‘the Great Recession encounters the Great Government Intervention’, which the ‘Great Government Intervention’ dominated. The global economy is moving towards recovery already. Economies from Germany to Japan and to Singapore are now out of recession. Having been emerged from recession in the third quarter of 2009, the US will likely confirm its recovery in the coming months.
Moving forward, asset price recovery performance will be based on three crucial factors, which include the global economy’s cyclical rebound strength; growth manipulators beyond inventory restocking; and the eventual strengthening of government stimulus.
However, a recovery brought about by recessions accompanied with financial crises proved to be weaker than simple ‘cyclical recession’ recoveries.
Meanwhile, unemployment rate in the US is approaching 10 percent, house prices dropped 33 percent, while the household savings rate in the US soared to 6.2 percent of disposable income from zero savings, before pulling back lately to 4.6 percent. The global economy might use another alternative to achieve growth if this indicates a ‘new frugality’ amongst US consumers. To offset this, central bankers must be very discreet about withdrawing stimulus. Looking back 40 years ago, the Federal Reserve in the US never increased its policy rate, until the decline in the unemployment rate was entrenched unequivocally.
Meanwhile, exports in China are still in deep contraction year-on-year. Chinese government has small incentive to reverse the monetary policy course at this stage with prices in deflation.
Notwithstanding the unsettled fundamental problems, risky asset prices will likely continue to increase.