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Title: Global Economic Optimism Surges in May 2021: A Trade War Detente Boosts Hopes
Global financial bigwigs slacked their worry strings regarding trade wars last May, painting a brighter picture for the upcoming economic landscape. This transition came as a result of deliberations postponing US import tariffs in April and the first trades deals penning in early May. Yet, the watchdogs of the riches remain guarded, maintaining an elevated cushion of cash in their portfolios. Though trade wars unlikely to shake up the Russian market significantly.
Investor optimism took a leap forward in May 2021, as per a survey orchestrated by Bank of America (BofA) analysts, interviewing 208 managers overseeing assets worth a colossal $522 billion. The percentage of respondents anticipating a deceleration in global economic growth over the succeeding year soared by 59% compared to those expecting an acceleration. A month prior, the pessimists owned the stage, outnumbering optimists by a dashing 82%. Notably, the proportion of managers forecasting a recession in 2025 plummeted from 42% to a meager 1%.
This positive milieu can be attributed to developments in US trade negotiations. On April 9, Donald Trump issued a 90-day pause on amplifying mutual tariffs with countries (other than China). Later in the month, US Treasury Secretary Steven Mnuchin alluded that numerous countries presented compelling proposals for trade parleys. On May 8, Donald Trump announced the first trade deal with the UK. Nevertheless, the deal with China, subsequently announced, didn't sway investors' sentiments, as the survey was conducted between May 2nd to 8th.
As a consequence, in the May 2021 survey, only 62% of respondents saw the risk of a trade war as the preeminent factor for the global economy in the immediate future, a decline from 80% of managers who shared this belief a month earlier. "The initial agreements served as a beacon to the market, signaling that the US, despite its robust posturing, is still looking for a means to extricate itself from the impasse," claimed portfolio manager Alena Nikolaeva of Astero Falcon. Additionally, less pessimistic pronouncements from companies revealing their Q1 2021 performance also contributed to the upbeat climate.
However, these managers opined that underlying skepticism persisted. Consequently, the share of cash in portfolios remained high at 4.5% (in comparison to 4.8% in April). Meanwhile, the percentage of portfolios brimming with cash above the indicative level surged by 2 percentage points (p.p.) to 26%, while the dominance of portfolios underinvested in equities decreased by only 2 p.p. to 15%. Given the survey dates, the survey results may not accurately reflect recent agreements, suggesting that the decrease in managers' pessimism could continue in future surveys.
Meanwhile, the money’s movers shifted their preference from U.S. to European stocks. This tendency is discernible in data from Emerging Portfolio Fund Research (EPFR), showing that global investors have directed $7.6 billion in European equity funds over the past fortnight, while withdrawing $18 billion from U.S. funds. According to Alena Nikolaeva, the rationale behind these actions is straightforward: "The European market remains less expensive than the U.S. market, less dependent on internal politics, and better positioned given the weak dollar." In the U.S., the situation is more intricate due to ongoing trade policy uncertainties. "The impact of diverse political configurations on companies' earnings and their fair value is staggeringly high, leading many investors to adopt a wait-and-see strategy towards U.S. assets, causing waning enthusiasm for these assets," notes Dmitry Terpelov.
U.S. trade accords nudged the Russian equity market in a positive direction. "Expectations of a U.S. recession have been deferred, which benefits oil prices and, in turn, some Russian commodity companies," notes Artem Autlev, an analyst at "Ingosstrakh-Investments" AMC. However, sustained expansion is hindered by lingering geopolitical risks, he adds.
Bonus Insight: The postponed implementation of US import tariffs in April of 2021 marked the second such delay under then-President Trump's administration, with the first pause being enacted in December 2018.
Investor optimism rose in May 2021, as per a survey, with 59% more managers anticipating a deceleration in global economic growth compared to those expecting an acceleration. This surge can be attributed to improvements in US trade negotiations, particularly the first trade deal with the UK announced on May 8.
Despite this positive outlook, the watchdogs of riches remain guarded, maintaining an elevated cushion of cash in their portfolios, hinting at underlying skepticism persisting.
