Bank of America Says We're Experiencing 'Peak' Everything and a Major Market Change Is Coming
Some of the hottest trades of the past few years could stage a sharp reversal as global markets face "peaks" in liquidity, free trade, and income inequality.
That's the big-picture call from Bank of America Merrill Lynch, whose analysts argue in a report published Thursday that an apparent fightback against globalization in advanced economies represents a game-changer for global asset-allocation.
"We are convinced that policy is decisively shifting in a direction that is less positive for 'deflation assets' and more positive for 'inflation assets,'" the team, led by Chief Investment Strategist Michael Hartnett, write. This year and next, investors face a reversal of "bullish" trends that have buttressed globalization and liquidity in recent years, they argue.
In sum, Hartnett and team say it's time for investors to consider a new normal for equity and fixed-income markets.
"A reversal of these trends, together with a shift toward fiscal stimulus and higher interest rates strongly argues that the excess returns from stocks and bonds in the past eight years are also likely to reverse," they say.
Explaining their rationale in predicting declining liquidity, the team cites declining enthusiasm among central bankers in Europe and Japan towards negative interest-rate policies. "Central banks are starting to feel political backlash for fueling inequality, and 'Quantitative Failure' (671 rate cuts since Lehman bankruptcy has fostered neither robust economic recovery nor 'animal spirits' as corporations & households continue to hoard cash) means that the era of excess liquidity and QE is now largely behind us."
Anti-immigration and anti-trade sentiment also appears to have increased in the U.S. and U.K. in recent months, while trade tensions are rising. Against this backdrop, BAML reckons trade policies might become more restrictive in the coming years. "Events show nations are becoming less willing to cooperate, more willing to contest," they write, adding that global trade expansion in 2016 is forecast at around 1.7 percent of GDP, below the rate of economic expansion, a development historically associated with recessions.
Inequality might also be reaching a boiling point in a bevy of developed markets, raising the prospect of active fiscal policies, which BAML reckons will help fuel inflation. In this scenario, investors should buy fewer bonds as "a shift toward Keynesian policy is likely to raise growth expectations and interest rates."
Amid signs of a growing backlash against the inequities generated by globalization, analysts at Bank of America last month foresaw a new era with looser fiscal policy in developed countries — combined with trade protectionism and wealth redistribution — that would redraw the global investment map. The report on Thursday adds meat to this call; BAML on Thursday says it is bullish on stocks and commodities and bearish on bonds. The bigger returns are likely to come from 'zero interest rate policy losers,' they conclude.
Nevertheless BAML concedes central banks could remain very accommodative in their policies, and a recession could imperil its calls to snap up inflation-hedges, while the IMF doubts a looser fiscal policy will be unleashed next year.