What Can Kill The S&P; What Can Save EMs; Just Two Things

What Can Kill The S&P; What Can Save EMs; Just Two Things
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While emerging markets recently tumbled into a bear market, the US stock market continues to surge, defying all fears of a Chinese slowdown, a global trade war, and peak earnings. But why? As Macquarie strategist Viktor Shvets writes this morning, US resilience is due to its role as the largest supplier of end-user demand, printer of reserve currency, and quality of its corporates. Meanwhile, EMs are an artefact of global forces, and of Chinese cooperation with the US. As a result, for synchronized growth one needs liquidity, trade and reflation. According to Shvets, these three are possible only when the US & China cooperate. He notes that "we are not there yet."

Below we share more details from Shvets on the most vexing divergence of 2018:

Why are US markets so resilient? Three reasons:

One of the more popular questions that clients asked us recently is why are US equity markets so resilient and when do we think EMs might break out from their bear market trajectory? US resilience is based on three factors.

  • First, US's role as the single-largest pool of global end-user demand. Unlike Eurozone and Japan that are essentially riding China's reflationary waves, the US (Anglo-Saxons, in general) are the only generators of sustainably high deficits. The US is the other side of excessive savings in the rest of the world.
  • Second, US$ role as the global reserve currency. While over the longer term, it is not good for anybody, in the short-to-medium term, it offers the US massive advantage in attracting capital and using it as a lever in negotiations.
  • Third, quality of US corporates. More than any other region, the US corporate sector embraced arbitrage opportunities that have become available over the last three decades in global product, labour & capital markets. Consequently, they are asset-light and cash-generative, which explains SPX strength.

EMs performance needs specific outcomes

EMs on the other hand are a tentative future promise but ....

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