The selloff in developed equity markets is overdone, says SocGen
In its latest global research note, Societe Generale said the selloff in developed equity markets is overdone.
The bank said that amid poor economic data from China, investors are worrying about a spillover effect from an economic slowdown there and its impact on global growth. However, it pointed out that in the US, the latest economic data were reassuring, with 3.7% GDP growth and an unemployment rate of 5.1%.
“This paints a positive outlook for the US economy,” said SocGen, whose US economists still expect a first rate hike in September.
In the Eurozone, figures are also positive, with unemployment dropping to a three-year low of 10.9% and the PMI well above 50 at 53.3.
SocGen said that while China is still a worry, the spillover is limited for now. It said the Chinese market is in its own bubble, like the equity bubble that had formed in 2005-07.
“The difference with the current situation is that the Chinese economy is now slowing down. Our economists predict Chinese growth will be at 6.9% in 2015 and only 6% in 2016.”
The spillover effect should be limited to the emerging market area and to commodities, as both are highly dependent on China, said the bank.
Finally, SocGen argued that bonds are no longer a safe haven.
It noted that during the subprime crisis of 2008/2009 and the Eurozone debt crisis in 2010/2011, investors sought a safe haven by investing in US treasuries or German bunds.
During the first crisis, yields moved down by 170 basis points in the US and by 90 basis points in Germany. In the second, they moved down by roughly 110bp and 90bp respectively.
“But this is not what we have observed since mid-August as a result of China’s turmoil,” the bank said.
It pointed out that equity markets have plunged by 5% to 15%, but bonds haven’t reacted much.
This highlights the fact that QE policy makes the usual safe havens such as bonds unattractive, specifically in the Eurozone, said SocGen.
“With central banks still active, the economy improving and bonds not being a safe haven anymore, we believe the current market selloff in developed equity markets is overdone.”