In a recent update, Elliott reminded that the recent rise in markets has been caused by continued easy monetary policy rather than improving economic fundamentals and real changes in investor sentiment.
“If it was a classic risk-on rally, you’d tend to have Japan doing very well because the Japanese stock market is very sensitive to upticks in global growth,” the strategist said.
Over the year to date, the best performing index has been the S&P 500, which is up 16.4% in local currency terms. MSCI Asia ex Japan, meanwhile, has risen 13.9%, MSCI Small Cap 13.3% and MSCI Europe ex UK 13.1%.
In contrast, the Japanese Topix is up just 3.5% year-to-date. Elliott noted that the larger members of the Topix, such as Hitachi and Nikon, are sensitive to rises in consumer discretionary and cap-ex spending. The fact that they have not benefitted from the rally suggests investors do not expect to see significant improvements in growth.
The markets that have done well, Elliott added, are those that have benefitted from the surge in liquidity that followed recent moves by central banks to loosen policy further and those that were buoyed by alleviating tensions in the eurozone.
“As Spock might have said: ‘This is risk-on but not as we know’. It’s liquidity driven, it’s not really based on fundamental growth prospects.”
Investors have moved towards risk assets in response to central banks’ quantitative easing (QE). As QE forces down the yield on government bonds, investors are forced to sell down their holdings to go in search of inflation-beating returns.
Furthermore, Elliott said volatility on riskier assets appears to have been lower than that on some government bonds in recent month. The six-month volatility for gilts is 6.8%, he noted, compared with 4.2% for emerging market debt and 2.7% for high-yield bonds.
The strategist added that the liquidity-driven support for markets cannot persist over the long term but stressed that there is no need for worry in the immediate future.
“These themes are going to continue to support risk assets. Despite weak global growth going into next year, the central bank response around the world is such as to produce negative real yields, pushing investors into higher-yielding stuff whether equities or fixed income,” he concluded.
“We don’t see any reason why this come to an end imminently but eventually this picture will unwind when interest rates rise … after inflation or growth picks up.”
