Which Markets Are Vulnerable to This Mid-Cycle Slowdown? | The Big Conversation | Refinitiv

TL;DR

The US asset prices and market indicators suggest vulnerability to a mid-cycle slowdown, with factors such as small caps underperforming, declining market breadth, and limited benefits for emerging markets.

Transcript

Are the markets vulnerable to mid-cycle slowdown? There are many signs from US asset prices that we're already at that stage. The ratio of small caps versus large caps has recently taken a new leg lower as sector and style rotations gather pace. The outlook for emerging markets looks particularly tricky, having seen very few of the usual early cycl... Read More

Key Insights

• 😥 US asset prices and market indicators point to vulnerability to a mid-cycle slowdown.
• 😀 Emerging markets have seen limited benefits and face a tricky outlook.
• ❓ Market breadth has declined, with fewer stocks participating in the rally.
• 🚨 The weaker dollar has not provided the usual benefits to emerging markets.
• 👾 M&A activity has reached record levels, driven by private equity and SPACs.
• 👨‍💼 Traditional businesses are under pressure to innovate through technology M&A.
• 🔒 The markets may experience a burst of activity from private equity before valuations become unreachable.

Questions & Answers

Q: What are the signs of vulnerability in the markets to a mid-cycle slowdown?

Some signs include the underperformance of small caps, declining market breadth, and limited benefits for emerging markets. Bond yields have also peaked, and fewer stocks are participating in the market rally.

Q: Why are emerging markets facing a tricky outlook during this cycle?

Emerging markets have seen few of the usual early cycle benefits that come with reflation. Additionally, Chinese policymakers' clampdown on their internet stocks has negatively impacted the performance of technology and Chinese equities within emerging market equities.

Q: How has the weaker dollar affected emerging markets?

The weaker dollar has not conferred the usual benefits on emerging markets. While there has been strength against the dollar, it has been underwhelming. Emerging market equities have also underperformed, with the ratio of the S&P500 versus the MSCI Emerging Market Index reaching its highest level since 2002.

Q: What is the impact of the M&A activity on the markets?

M&A activity has been exceptionally strong and has reached record levels. Private equity and SPACs have been driving deal activity, but as corporate deal-makers become more comfortable with M&A, private equity may face pricing pressure. Technology M&A continues to be the highest sector, with traditional businesses also looking to innovate and go digital through acquisitions.

Summary & Key Takeaways

• US asset prices show signs of mid-cycle slowdown, with small caps underperforming and sector rotations taking place.

• Emerging markets have seen few early cycle benefits and face a tricky outlook.

• Bond yields have peaked, market breadth has declined, and fewer stocks are joining in the rally to new highs.