Expectations of global economic growth are now at a net 13%, the lowest since April 2020
The net global equity allocations, however, stood at 50%—much above the 20-year average
A few months into the pandemic, the International Monetary Fund (IMF) had warned that the recovery that follows would be K-shaped. It’s becoming clear global equity markets and economic growth are the two divergent forks in this ‘K’.
Sure, the stock market and economic growth hardly moved in tandem even in the pre-pandemic era, but the wedge has widened in a counter-intuitive move. The latest global fund managers’ survey highlighted that this K is very much dominant in investment decisions.
According to the Bank of America Merrill Lynch’s September survey, global fund managers have turned bearish on the global economy. Expectations of global economic growth are now at a net 13%, the lowest since April 2020. Also, this is a significant decline from a 91% peak in March this year. The survey report said that the delta variant of the virus was behind this pessimism.
In sharp contrast, the broader equity market positioning remained firmly bullish among fund managers. The net global equity allocations stood at 50%, which is much above a 20-year average of 29%, said the BofA survey. Also, investors haven’t adjusted their portfolios with cash levels up slightly to 4.3% in September from 4.2% last month.
What’s more, despite sluggish earnings growth and weak fundamentals, global equity market capitalization has shot up 75% to $119 trillion from the lows of March 2020, showed analysis by Motilal Oswal Financial Services Ltd. “The divergence between Wall Street and main street pre-dates the pandemic but has widened in the past year. At a granular level, the universe of the benchmark indices, i.e. listed companies, is a subset of the growth/GDP representation; hence these variables may not necessarily move in sync," said Radhika Rao, an economist at DBS, in an email response.
But this time around, there are a host of other reasons behind this yawning gap. “These include low cost of borrowings and flush liquidity chasing returns, valuations underpinned by cheaper discounting of future profits, sector-specific outperformance," Rao said. Although the extraordinary fiscal and monetary support by central banks was aimed at preventing an economic recession, economists say that unorganized sectors in emerging economies such as India have suffered a lot.
This is in line with IMF’s warning that major epidemics in this century have raised income inequality and hurt the job prospects of those with only a basic education, while scarcely affecting the employment of people with advanced degrees.
“There is rising divergence not only among sector indices, but there is also anecdotal evidence of rising inequality at the social level. On the one hand, massive high hiring by Indian tech companies is resulting in a jump in income levels for their employees and on the other hand, blue-collar workers employed in smaller and regional firms who cannot operate remotely have lost jobs with the shutdown of many smaller companies," said an economist requesting anonymity.
Some analysts are of the view that this disconnect is unlikely to narrow even after surplus liquidity is withdrawn by global central banks. Since the equity market has already discounted the gradual tapering to a large extent, the actual event may not elicit a steep correction. As such, responses in terms of tapering by central banks across countries may differ, another risk for global growth. The upshot is that the chasm between growth and markets may well continue.