Growing macro momentum for a more balanced rally?

The rally in risk assets that began in November last year has continued in 2024, with momentum building. Both credit and equities have recently performed more consistently (with the exception of the bond market), demonstrating investors' strong risk appetite. In this week’s Simply put, we explore the possible reasons for this growing convergence. Let's not underestimate fundamental factors, including the importance of macro trends. 

 

Need to know: For several quarters, US assets have shown an impressive supremacy  The last three months have featured a more balanced performance This better balance could well reflect growth that is itself becoming more homogeneous

 

A rotating rally

For a prolonged period, we have witnessed the unshakeable supremacy of US assets. This dominance was preceded by a tumultuous period of abrupt interest-rate increases, which cost both the US technology complex and markets as a whole dearly. Even with rates stabilising at persistently high levels, US equities have regained their strength, and markets have absorbed around USD 20 billion of new investment-grade credit issuance since the start of the year. The appetite for US assets remains, but something new is on the horizon.

Figure 1 clearly illustrates this shift. By analysing the percentages of stock market indices reaching one-year highs and segmenting them by region, we see US leadership since November. However, Europe and Asia clearly gained momentum over the past two months. At the height of February, almost 30% of Asian stock indices and 35% of European indices reached record highs, coming close to the behaviour of US benchmarks. These statistics send a clear message: more balanced market gains have been made since the start of the year. But how can we explain this phenomenon?

 

FIG 1. Percentage of regional indices above their 52-week highs

Source: Bloomberg, LOIM. As at April 2024. For illustrative purposes only. Past performance is not a guarantee of future returns.

 

Why now?

Beyond the valuation argument, which suggests that US equities and assets are more expensive overall, there are fundamental reasons for this reversal of fortunes. An important one is economic growth. The recent strength of US growth has come as a surprise, while the rest of the world has struggled to keep up. However, since the start of the year, we have seen the opposite phenomenon: Europe and China are gaining momentum.

What has happened historically when such events occurred? Figure 2 provides some answers. When growth momentum in the US is stronger than in the rest of the world, US equities outperform. When the opposite happens, the situation can go the other way. At present, our growth indicators are starting to tilt in favour of the rest of the world, while the 12-month performance of US equities remains well ahead of peers.

Historically, this type of pattern leads to a more balanced performance by region, and this could well be the case today. The correlation between macro momentum and performance has strengthened (especially since 2022), and the tentative macro trends suggested by some of the regional leading indicators could therefore lead to a global rebalancing of demand for risk assets. This in no way diminishes the appeal of US equities, but it could lead to a more balanced rally than that seen in recent quarters. The good news is that many non-US indices are currently attractively valued.

 

FIG 2. Relative performance of US and rest-of-world equities, compared with the relative growth momentum of both markets (left) and correlation between the two (right)

Source: Bloomberg, LOIM. Reading note: growth momentum is approximated by the nowcasting indicators presented below. As at April 2024. For illustrative purposes only. Past performance is not a guarantee of future returns.

 

Simply put, a better balance in global growth could lead to a more balanced rally in the markets.

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Macro/nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises and global monetary policy surprises are designed to track the recent progression of macroeconomic factors driving the markets.

Our nowcasting indicators currently show:

• Our growth indicators have picked up recently, as statistics in the US, Europe and China all improve
• Our US inflation surprise indicator is back above 50%, pulling the global indicator up. Beware of unpleasant surprises in terms of price dynamics
• The status quo on monetary policy continues, with the global pivot becoming clearer

 

World growth nowcaster: long-term (left) and recent evolution (right)

World inflation nowcaster: long-term (left) and recent evolution (right)

World monetary policy nowcaster: long-term (left) and recent evolution (right)

 

Reading note: LOIM’s nowcasting indicator gathers economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).

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