{"text":[[{"start":4.8,"text":"The writer is chief multi-asset strategist at HSBC"}],[{"start":8.52,"text":"Given the scale of negative developments that markets have had to contend with in the last five years — from a pandemic to energy shocks — it seems nothing short of breathtaking that riskier assets like equities have been so resilient."}],[{"start":21.48,"text":"One popular narrative is that this has recently been a result of AI, which is seen as the sole driver of current strong earnings growth in the US. But that belies the broader trend."}],[{"start":31.52,"text":"Even outside of tech and AI, US earnings are currently about 50 per cent above the pre-Covid trend. Higher nominal economic growth and multi-decade low corporate tax rates have been major drivers behind this. And outside the US, earnings growth has been rising in the last 12 to 18 months."}],[{"start":48.8,"text":"From a top-down perspective too, there is a gap between current conditions in the economy and the consensus view which has persistently run counter to the popular adage of “never bet against the US consumer” in the past few years. As a result, the US economy has repeatedly surprised on the upside."}],[{"start":66.16,"text":"And there’s a long list of other reasons behind the strength of equity markets."}],[{"start":70.48,"text":"Increased allocations to equities: Higher inflation since 2021 has spurred a shift in equity-bond market correlations, with the asset classes moving more in tune with each other. Bonds no longer diversify portfolios as they used to, let alone hedge them. We think this means allocations to equities will probably remain high in the coming quarters, with big investors seeking downside protection via option markets and other more exotic strategies. These allocations support not just higher valuations of equities but also the spectrum of riskier assets."}],[{"start":null,"text":"
"}],[{"start":101.7,"text":"The wealth effect: The increase in US household wealth has been much more rapid than pre-Covid. This isn’t just a function of higher equity markets. Even the value of cash holdings is almost 50 per cent above trend. The vast majority of this increase in US wealth is among high-income households — those that not only spend the most but also invest a bigger portion of their wealth back in financial markets."}],[{"start":124.04,"text":"Larger central bank toolkit. Analogies between current conditions and the lead-up to the 2007-08 financial crisis are often made. What those comparisons miss is that central banks have a much wider toolkit nowadays — and they aren’t afraid of inventing new ones if need be, even in the middle of a rate-rising cycle. The Federal Reserve’s emergency liquidity programme in 2023 was one example of this. Such implied support boosts risk appetite."}],[{"start":152.24,"text":"Lower oil intensity of developed economies. Compared with the 1970s and 1980s, consumer spending on energy as well as economy-wide energy consumption per GDP is much lower nowadays. This means that, even as shocks such as Russia-Ukraine or the Middle East conflict have led to higher oil prices, riskier assets have largely taken them in their stride."}],[{"start":174.36,"text":"Low private sector leverage and lower sensitivity to interest rates. The US housing market remains in the doldrums and interest rates have risen. But the average effective rate on existing mortgages is actually some 2 percentage points lower than the current rates being offered. And housing activity is no longer as important as it was before the financial crisis."}],[{"start":195.48,"text":"Lower interest rate sensitivity also applies to consumers and corporates overall: the ratio of US household debt payments to disposable income, for example, is not even at the average levels seen in the 2010s, let alone the levels before the financial crisis."}],[{"start":null,"text":""}],[{"start":210.56,"text":"For companies, net interest payments have slumped to a more than 20-year low and to record lows when compared with record-high corporate profits. And almost two-thirds of bonds and loans of S&P 500 companies won’t expire until after 2030, with only about 10 per cent of debt being on a floating rate these days."}],[{"start":229.88,"text":"Quicker information flow and price discovery and other technical factors. Programme trading, AI, social media etc have all contributed to a quicker information flow. Drawdowns now happen much quicker. But so do recoveries, in turn fuelling the buy-the-dip mentality further. Other technical factors include the rise of index investing. Buying and selling linked to the rebalancing of index fund vehicles can dampen stock market volatility."}],[{"start":256.52,"text":"As ever, there are risks to the bullish view and we may well see short-term drawdowns in riskier assets in future. But the list of structurally supportive factors is simply too long for me to join the bearish camp."}],[{"start":269.32,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1790145873_5172.mp3"}