Traders work on the floor of the New York Stock Exchange (NYSE) in New York
Traders work on the floor of the New York Stock Exchange (NYSE) in New York. Although global markets continue to rally, albeit at a slower-than-usual pace, investors ponder whether any of the recent macroeconomic developments warrant pulling out their investments or staying the course. Image Credit: REUTERS

Dubai: Although global markets continue to rally, albeit at a slower-than-usual pace, investors ponder whether any of the recent macroeconomic developments warrant pulling out their investments or staying the course.

“Global macro keeps surprising on the upside overall but is somehow kept in check by ambiguous political developments,” said Stéphane Barbier de la Serre, macro strategist at Makor Capital Markets.

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“Monetary and fiscal policies remain massively accommodative across both hemispheres,” Barbier de la Serre added. “Against such a supportive background, investors remain characteristically cautious if not diffident.”

Monstrous market rally justified?

Stock markets across the globe have been furiously rising in recent months, but questions have been consistently rising on what is behind the rally and how long can it go on for.

The International Monetary Fund had earlier warned that the aggressive and voluminous rally was a gamble by investors on the fact that central banks will ignore the risks of a buildup in debt and continue to provide support at the current record levels.

“In first analysis, (the rally) could certainly legitimate a bit more cautiousness looking forward across that versant,” Barbier de la Serre added. “In second analysis though, the ultimate question may be that if you end up lightening exposure on equities altogether, where on earth will you reinvest the monies in?”

Investors posed with conundrum

The broad-based gains have presented investors with a conundrum. While many are uneasy owning assets that appear richly valued or trade at record highs, holding too much cash or an outsize allocation to underperforming stocks has hampered portfolio performance during the recent rally.

Another concern is the possibility of a broad reversal where assets that appreciated in tandem sell off simultaneously, leaving investors with few places to shelter.

Such market action was seen at various times during the coronavirus-fueled sell-off in March, when gold, stocks and Treasuries tumbled together as frightened investors went to cash.

Markets elsewhere track US indices

Apart from the US S&P 500 benchmark trying to recapture records, international markets – Germany, South Korea, China and Japan – are also marching back to the year’s highs. Those countries’ leading stock market indexes are at least 7 per cent within reach of their 2020 peaks.

“All in all, we are still fairly constructive on risk assets in general and global equities in particular,” Barbier de la Serre said, adding that he still prefer emerging markets as emerging markets are still looking “reasonably cheap” against the S&P500.

Among international markets, investors and traders are warming up to Asia markets, with the Shanghai Composite index up 27 per cent from its March lows and 3 per cent from a high set in mid-July.

Investors warm up to Asia markets

“We are even more constructive on commodities in general and silver in particular,” Barbier de la Serre added.

There have off late been lacklustre demand for the latest US 30-Year Treasury Bond and on the macroeconomic front in Asia, Chinese industrial output came in below expectations. In South Korea, industrial production bounced the most in 30 years, rising 7.2 per cent in June after dropping 7 per cent in May.

This boost was reflected on the MSCI South Korea ETF as well, which hit a 52-week high Wednesday. It has risen a mammoth 74 per cent off its March low.

Stay the course or pull out?

Plenty of investors believe the rallies are likely to continue as long as interest rates remain low and the central banks will keep pumping out stimulus - factors that have benefited everything from technology-related stocks to commodities such as oil and gold.

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However, some others believe the answer is to sell now and wait for things to get cheaper. Analysts at BofA Global Research noted that August kicks off what has historically been the weakest three-month stretch of the year for equities, where the average historic return stands at about 0 percent.

Investors pulled a net $6.5 billion out of US equities in the first week of this month, the largest outflows in a month-and-a-half. Persistent buying on dips and wild rallies in the shares of companies have convinced some analysts that markets may be entering a euphoric phase that tends to precede corrections.