Improving global economic cues augur well for equity markets

Almost all major equity markets in the world – except South Africa and oil producing regions like UAE and Russia, have gained anywhere from 17% to 35% over the last one year. Now the question is - whether such gains are sustainable.

The US GDP is growing at a 3.2% annualised pace (better than earlier estimate of 3%) in the second quarter, the Atlanta Federal Reserve says. The US economy continues to remain near full-employment. For the 120th consecutive week, the unemployment claims have been below 300,000 - the longest stretch that the US jobs market has remained below that level since 1970.

The International Monetary Fund raised its forecast for economic growth of China – world’s second largest economy - this year to 6.7%, from 6.6% forecast earlier, citing expansionary credit and public investment. It expects China's growth to average 6.4% from 2018-2020. The fear of alarming debt levels leading to hard landing of the Chinese economy is receding.

Japan, the third largest economy in the world, last week raised its overall view of the economy for the first time in six months. In May, its exports surged 14.9%, the fastest in more than two years and imports rose 17.8% in the year to May, the strongest gain since early 2014. Confidence among Japanese manufacturers also bounced in June to match a decade-high level recorded in April and is expected to rise for several months.

The IFO economic institute raised its 2017 the growth forecast of Germany, the largest economy in Europe, to 1.8% from 1.5% estimated previously and expected to improve further to 2% in 2018. The Britain, the second largest economy of Europe, showed its factory orders hitting their highest level in nearly 30 years and export order becoming strongest in 22 years. Russian President said recently that the Russia's economic crisis was over.

While cheap oil remains as a risk factor for the oil producing regions, it is also a zero sum game – major importers like India would remain as the big beneficiary in terms of saving of huge oil import bill and low inflation. However, any further massive fall in oil price would be a risk factor for the global equities as it would be a strong sign of global deflation. On the domestic front, any failure of current monsoon and also in pick up in corporate earnings would be possible risk factors. Otherwise, not only sustainability of current bull run, even further gain in the global equity markets including Indian markets looks feasible, if we read carefully the cues from the major economies in the world.

The writer is founder and managing director, Equinomics Research & Advisory Pvt Ltd