Evans-Pritchard a bull in a China shop

Advertisement

From Ambrose Evans-Pritchard:

Barclays has advised clients to jump into world stock markets with both feet, citing the fastest growth in the global money supply in over thirty years and an accelerating recovery in China .

Ian Scott, the bank’s global equity strategist, said the sheer force of liquidity will overwhelm the first interest rate rises by the US Federal Reserve, expected to kick off next month.

Global equities rose by an average 15pc over the six months after the last three US tightening cycles began, on average, and Barclays argues that this time stocks are cheaper.

The cyclically-adjusted price to earnings ratio (CAPE) for the world’s equity markets is currently 18, compared to 25.5 at the beginning of the last rate rise episode in 2004.

This is roughly 14pc below the CAPE average since 1980, though critics say earnings have been artificially inflated by companies borrowing a rock-bottom rates to buy back their own stock.

Mr Scott said the growth of global M1 money – essentially cash and checking accounts – has surged to 11pc in real terms, led by China and the eurozone. This is higher than during the dotcom boom and the pre-Lehman BRICS boom.

It is likely to ignite a powerful rally in equities nine months later if past patterns are repeated, although the lags can be erratic, and the M1 data gave false signals in the mid 1990s.

Barclays said American stocks are trading at a 30pc premium to the rest of the world. This gap is likely to close as emerging markets – “the epicentre of negative sentiment” – come back from the dead. The pattern of foreign fund flows into the reviled sector has triggered a contrarian buy-signal.

Everything hinges on China where real M1 money has ignited after languishing for over a year. Floor space sold is growing at 20pc and house prices have stabilized.

Simon Ward from Henderson Global Investors says real M1 is now surging in China at the fastest rate since the post-Lehman credit blitz, though money data is cooling in the US

Chinese fiscal spending has jumped by 36pc from a year ago and bond issuance by local governments has taken off, drawing a line under the recession earlier this year. “A growth revival is under way and will gather strength into the first half of 2016,” he said.

While this thesis could boost stock markets for while, it is very unlikely to produce much of a recovery in China. Floor space sold has decoupled from construction starts because China is built out. Property prices have not stabilised, they’ve bifurcated with raging bubbles in one tier one cities and everywhere else stalled or falling.

To my mind the thesis is based upon a false assumption by AEP (and Barclays). AEP has argued for a year that China was in a “hard landing” and now he’s shifted to expectation of a rebound on monetary easing. This is cyclical thinking and is wrong. China is in a structural adjustment to less credit-intensive growth because too much of its credit issuance is being absorbed by nothing more than paying down older credit. M3 fell away somewhat and has since rebounded a little as well but the impacts on growth are negligible either way.

Advertisement

China is on a glide slope to slower growth. Fiscal spending will support private deleveraging and may occasionally produce accelerating quarters but the trend will remain down.

It’s neither a soft nor hard landing, it’s converting the aeroplane into a car and driving it out of the airport into Western levels of growth.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.