The instructor often shouts at the attendees to turn up the cycle’s resistance to levels that make my poor legs feel like jelly. I’ve occasionally been tempted to pretend to increase my bike’s resistance by theatrically sweeping my hand over the dial without actually changing a thing.
But then again, I would feel guilty about not pushing myself to get the best workout possible – my pace would be out of sync with the rest of the class after all. On that note, it appears I’m not on my own – global equity markets are also battling through a cycle class of their very own.
Each economy appears to be pushing harder and faster in this cycle. Purchasing managers’ indices (PMIs), which track economic momentum, are hitting some of their multi-year highs, with PMIs for manufacturing across all major economies in positive territory. Macroeconomic growth around the world is also supporting corporate earnings, with earnings per share (EPS) now on the rise. Global corporates, as measured by the MSCI All Country World Index, are currently delivering almost 10 per cent year-on-year EPS growth.
The question is, which equity markets have benefited the most this year? Emerging markets have had an incredible run, rallying nearly 30 per cent in local currency terms year to date, driven by EM earning expectations that continue to rise, amid climbing oil and commodity prices. What’s more, the broad growth expectations for emerging markets compared with developed markets are stronger.
This is the emerging market (EM)/developed market (DM) growth differential; essentially, how much more emerging markets are growing compared with DM countries. When that differential is high, EM equities tend to outperform DM equities.
Japanese equities have also delivered nearly 20 per cent in local terms. The asset class is the most cyclically-orientated of the DM equities. Nearly 60 per cent of the MSCI Japan Index is a cyclical stock versus roughly 40per cent in the UK and Europe and less than 40 per cent in the US.
The fact that global trade has been picking up at rapid speeds and that Japan is a globally orientated market has been a key support for the asset class.
It is clear that we are in a period of global synchronised recovery. Whether it is the global nominal GDP numbers that are keeping up a 4 per cent to 5 per cent year-in-year growth rate, or the increasing consumer confidence and retail sales numbers across the world, both the hard and soft data are telling us we are in an upswing.
But as we know, this momentum will run up against resistance at some point. There will be no pretending to turn up the dial when global growth slows and companies are unable to keep up. There are a few indicators to keep in mind, primarily US recession risks, which are currently low. If and when US wage growth and interest rates rise, US companies will feel the pain – the risk of which remains low over the next 12 months.
For now, we expect the positive economic fundamentals to continue to drive the equity markets. In the meantime, I will be found grudgingly trying to keep up at 6am spinning classes.
Nandini Ramakrishnan is a global market strategist at JPMorgan Asset Management
