Rising protectionism calls for caution on equities

Trade protectionism is rising across the world, starting from the US to Australia, Singapore, etc. Surprisingly the US, which is the leader of promoting free economy in the world, is at the forefront, vigorously ushering in trade protectionism.

The world economy was fortunate enough to recover from significant deflationary fears of early 2016, when the metal and resource (like crude oil) prices touched anywhere from 6-to-12-year low. Since then, most prices recovered a lot. For example, from 2016 bottom, while aluminium, copper and zinc recovered 31%, 35% and 68% yoy, respectively, oil prices bounced over 80% yoy by February 2017.

However, rising protectionism has revived global deflationary fear to some extent now. For example, restrictions on Chinese steel exports to the US have already led to steel prices in China falling 23% last week from their 2017 peak. Metals like copper and zinc, and crude oil have fallen 7% to 10% in the last one or two months.

Recently, the US drillers increased the count of oil rigs to over 683, the highest since April 2015. Now the US shale production in May is set for its biggest monthly increase in more than two years. Despite implementation of oil output cut by Opec and non-Opec, oil prices are already down more than 10% from the recent peak. It is further likely to fall, impacting the aggregate income of major oil producing economies, leading to further intensification of deflationary fears.

Along with prices of metals and resources, the inflation is also reversing in few major economies. Despite near full employment, the consumer price index dropped 0.3% in the US in March, the first decline in 13 months and the biggest since January 2015. US producer prices slipped 0.1% March for the first time in seven months. Last week, Bank of Japan said that the central bank needs to continue with its easy monetary policy because consumer prices are still distant from its 2% inflation target.

Of course, the IMF expects the global GDP growth to improve to 3.5% in 2017 from 3.1% in 2016 and further to 3.6% in 2018. However, if protectionism continues to rise and hence, the deflationary pressures also get aggravated, the forecasts for global GDP growth could be revised downwards.

Moves on visa restrictions for the Indian IT professionals have already cracked large IT stocks to hit near 52-week low on the domestic stock exchanges. Already revenues of large Indian IT companies started growing in poor single digit. Any further rise in protectionism in the major economies of the world could impact the global growth as well as global equities. Hence, cautious approach is needed while chasing over-valued stocks at this juncture. 

The writer is founder and managing director, Equinomics Research and Advisory