The on-again, off-again US-China trade war has befuddled markets, and put paid to expectations on global growth. One indicator of this is the Citigroup’s Global Economic Surprise Index, which is still in negative territory. The index measures how many times actual economic data bears or misses estimates. Readings in the negative territory indicate that economists around the world have been too gung-ho about economic growth. Citigroup’s Economic Surprise Index for emerging markets (EMs) has shown a similar trend.

As the chart above shows, the index was positive for almost all of 2017. That is because actual data beat estimates most times, given that global growth was gathering momentum. Ergo, growth turned out to be better than expectations.

But then trade war struck, and with the two largest economies involved in a back-and-forth slugfest, global growth suffered. Consequently, the index turned negative. Citigroup’s index aims to closely mimic the impact of economic surprises on markets.

Ahead of the G20 summit in Argentina last week, the International Monetary Fund (IMF) had warned that in the wake of trade conflicts, the outlook for the world economy has grown worse. It should be noted that only recently, in October, IMF downgraded its forecast for world growth. Although the US and China have temporarily deferred the levy of additional tariffs, the trade-war headwind is not completely out of the way.

Ironically, while the surprise index has turned negative, global equity market valuations seem to suggest everything is fine on the growth front.

The one-year forward price-to-earnings (P-E) multiples of MSCI World Index and MSCI EM Index haven’t corrected significantly. The one-year forward P-E for MSCI World Index was around 16 times in 2017 and is currently at 14 times. Similarly, the one-year forward P-E for MSCI EM Index was around 12 times last year and is now at 11 times.

The US-China trade war aside, there are other key events that would have a bearing on the global growth outlook.

For instance, the outcome of the meetings of the Organization of the Petroleum Exporting Countries (Opec) and non-Opec nations on 6 and 7 December. Investors are anticipating that Opec and its allies will cut production, and the extent of the output cut will determine the direction of crude oil prices, going ahead.

That will be followed by the US Federal Reserve’s meeting on 19 December. This meeting is crucial, especially after chairman Jerome Powell’s latest comments indicating that the interest rate hike cycle may be nearing its end.

If global equity markets were perturbed by the potential downside risks to growth, the valuations would have taken a big knock. The absence of this is the real surprise.