Tightened financial conditions are likely to lead to a “phase change” in world markets in the second quarter, which will result in lower overall returns and, according to UBS Group AG, will favor growth stocks.
A shift from a liquidity-driven market to a market based on growth and earnings will take place as inflation enthusiasm peaks and precedes any increase in Federal Reserve support, strategists including Bhanu Baweja said on Monday. a note written. This regime change will be characterized by a low in real rates and credit spreads – which will indicate the end of liquidity ‘headwind’.
“While these changes do not imply a major reduction, they do cause a significant change in the nature of the rally,” the strategists wrote. “Liquidity winds have made the largest contribution to market profits.”
A recent increase in US real yields has increased concern among investors who view negative real rates as a cornerstone in the rise in risk assets, which has caused global equities to rise at all times. The rate on 10-year treasury inflation-protected securities rose to as little as 0.77% last week from minus 1.08% on 11 February.
Although higher real returns indicate that the economy is recovering, this could lead to a tightening of financial conditions and a shift in asset allocation.
“A small increase in real rates is unlikely to be a major problem, but as real rates accelerate, each increasing step becomes more challenging for markets,” Baweja and his team wrote.
The rise in real returns is canary in the coal mine for risk assets
An analysis of similar historical “phase changes” when liquidity managers switched to neutral from loose indicates that lower market returns and growth stocks perform slightly better than value stocks, UBS said. The dollar usually has modest gains against currencies in emerging markets and an exchange from the US to other markets is becoming less compelling, the strategists write.