Crimean tensions could spark a bigger selloff in Western shares. Russia’s military intervention in Ukraine sent the Moscow index down more than 10 percent on Monday, while safe government bonds rallied, and some developed-market bourses slid by 2 percent or more. Investors are likely to pull even more money out of emerging markets. Their faith in developed equities, particularly European ones, has survived previous stumbles. But this too is now on shakier ground.
In the last three months, MSCI’s dollar index of emerging markets has shed 5 percent, while European stocks have gained by a similar amount. Emerging-market turmoil and a Federal Reserve decision to keep trimming asset purchases caused rich-world ructions in late January. But while investors fled developing markets, cash continued to flow into European equities, and inflows were only temporarily disrupted into U.S. shares. EM equity funds have seen outflows for a record-breaking 18 straight weeks while European ones have now enjoyed eight months of inflows, Bank of America Merrill Lynch said last week.
But Crimea could be a turning point. Britain calls the crisis Europe’s biggest in the 21st century. That alone is enough to send some investors scurrying to hide cash under the mattress.
To make things worse, developed markets’ valuations look stretched, especially in Europe. The price-to-earnings ratio for the STOXX Europe 600 is 14, or nearly a fifth more than its 10-year average. The S&P 500 is above 15 times PE, or 10 percent above its average.
Second, stocks have been bid up by borrowed money. U.S. margin debt hit record highs in January, according to NYSE data. A selloff could trigger margin calls that would see the stock-market slide feed on itself. And third, yields on even the safest government bonds are higher than they were a year ago. That too could tempt risk-averse managers away from equities.
It’s too early to call the end of the five-year stock-market rally. Monetary policy is still ultra-loose in big economies and developed economies are still growing. But high valuations and unpredictable geopolitics raise the risks of a deeper correction.
CONTEXT NEWS
- The price/earnings ratio for the DJ STOXX 600 Europe is 14.1. That is 18 percent above its 10-year average of 11.9, according to Datastream. The p/e ratio for the S&P 500 is 15.2, 10 percent above its 10-year average of 13.8.
Source: Reuters
In the last three months, MSCI’s dollar index of emerging markets has shed 5 percent, while European stocks have gained by a similar amount. Emerging-market turmoil and a Federal Reserve decision to keep trimming asset purchases caused rich-world ructions in late January. But while investors fled developing markets, cash continued to flow into European equities, and inflows were only temporarily disrupted into U.S. shares. EM equity funds have seen outflows for a record-breaking 18 straight weeks while European ones have now enjoyed eight months of inflows, Bank of America Merrill Lynch said last week.
But Crimea could be a turning point. Britain calls the crisis Europe’s biggest in the 21st century. That alone is enough to send some investors scurrying to hide cash under the mattress.
To make things worse, developed markets’ valuations look stretched, especially in Europe. The price-to-earnings ratio for the STOXX Europe 600 is 14, or nearly a fifth more than its 10-year average. The S&P 500 is above 15 times PE, or 10 percent above its average.
Second, stocks have been bid up by borrowed money. U.S. margin debt hit record highs in January, according to NYSE data. A selloff could trigger margin calls that would see the stock-market slide feed on itself. And third, yields on even the safest government bonds are higher than they were a year ago. That too could tempt risk-averse managers away from equities.
It’s too early to call the end of the five-year stock-market rally. Monetary policy is still ultra-loose in big economies and developed economies are still growing. But high valuations and unpredictable geopolitics raise the risks of a deeper correction.
CONTEXT NEWS
- The price/earnings ratio for the DJ STOXX 600 Europe is 14.1. That is 18 percent above its 10-year average of 11.9, according to Datastream. The p/e ratio for the S&P 500 is 15.2, 10 percent above its 10-year average of 13.8.
Source: Reuters
