Since the outset of the pandemic the global economic cycle has been in accelerated mode. We witnessed one of the shortest downcycles ever and the quickest recovery of employment for any recession in decades. By the middle of last year, the U.S. economy showed clear signs of mid-to-late cycle behavior, with low employment and rising prices. Now, we are clearly late cycle, with Central Banks having to tighten monetary policy and yield curves flattening underway.
Asset prices have behaved as expected both on the way down and the way up: risk assets (value, small caps, cyclicals) did very poorly on the way down and then very well on the way up. Defensive assets such as quality growth held up on the way down, underperformed on the way up and have proved resilient in the current late phase. Increasing volatility in asset prices and the collapse of speculative bubbles are also signs of a cycle end.
We are now seeing the cycle go full circle, with the typical signs of contraction appearing.
Leading Economic Indicators are pointing down, as shown in the charts below. The first chart is the OECD’s global LEI; the second chart shows LEIs for the U.S. and Korea, the two most important bellwethers of the global growth cycle.
Dr. Copper, also famous for his ability to predict global cycles, also is signaling problems ahead.
The implication is that we are entering a risk-off phase when investors will shun value, small caps and cyclicals. Of course, this includes emerging markets, particularly non-China assets. This will create the next good buying opportunity.
Dear Jean, thanks for this post and all your work on this site. I’m curious how to think about any connection between the coming cycle turn and expected EM returns in your recent post, which to me indicates that while many major EMs are also late in the cycle along with the US, the majority of them are described as early cycle. Any difference in shorter in shorter-term (or longer-term) performance that you’d expect between these two groups?
Generally, I would avoid EM in this part of the cycle. As the cycle plays, I would accumulate in those markets that have more favorable domestic cycles, less debt and better valuations. Turkey, Indonesia, for example.
I’m curious when do you think the buying opportunity will occur. Are you timing it? I’ve just bought some Turkey today.
Turkey is attractive but it does face a new strong headwind in rising oil prices.
Thanks Jean, appreciate the post
Is this a go-to-cash moment? Or do you see any geographic region at reasonable valuation? Perhaps the UK with it’s tilt to consumer staples and energy.
Generally, do you think it is easier to judge the valuation of a single stock or a geographic sector?
Valuation of a single stock is about discounting cash flow while valuation of a geographic sector is more about GDP growth and mean reversion. So, two very different things.
My guess is that international defensive value will do best for the time being, as it did last year.