Although the central bank has signaled that it will consider cutting policy interest rates for the first time at its September meeting. But global stock markets reacted very negatively. That's because after that, key economic indicators such as the manufacturing purchases index contracted more than expected and the unemployment rate rose to 4.3%, as investors worried the central bank was cutting interest rates too slowly until the economy entered recession. Japanese, South Korean and Taiwanese stock markets. Or even in the US, where prices continued to fall for the 3rd week in a row.
However, such concerns may be overblown, as it is not yet clear whether the weight of emerging economic data will lead to a recession, so investing in stocks will be a fair value once this year to increase their weighting.
First, recent economic data is not as worrying as the market is currently reacting to. The latest data is no worse than it has been since the post-Covid crisis. For example, the United States' July manufacturing PMI index, although contracted at 46.8 points, remains at the same level as in 2023 for 5 of the 12 months, but the United States' GDP has never been. It was negative in one quarter that year.
Meanwhile, US non-farm payrolls numbers for July came in at just +114,000 jobs, which was +175,000 jobs lower than the market expected.
But looking at the average of the last 3 months, it is still at +170,000 levels, close to +150,000. In general, the Fed has started to cut interest rates as it has in the past, and, in July, the state of Texas was hit by Hurricane Beryl, which may have been a factor in reducing employment only temporarily this month.
Next, the interest rates will fall and returns from investing in the stock market will be better than at other times. The 12-month average return of the MSCI World Index andWithout a 12-month recession, the average return is 10.4%, while the average 12-month return from 1989 to 2023 is only 6.5%. This is because the yield spread of the stock market widens when interest rates fall.
By earning yield gap (EYG) or the difference between the net profit ratio of listed companies and the yield on government bonds. Typically, 10-year government bonds are used as a benchmark. In general, stocks should have a positive EYG because it reflects investors' expectations of returns from riskier stocks than government bonds.
Therefore, when the central bank announces a reduction in policy interest rates, it will help debt instruments earn lower returns, even if the return on equity remains the same.
MSCI World's EYG has now risen to 2.28%, so at a time when the stock market has been corrected by more recessionary concerns, the gains have not diminished, making EYG higher. The stock market is very interesting.
AndFinally, analysts also estimate that profits for listed companies around the world will increase by 4.5% over the next 12 months from the start of the year, led by Asian stock markets which revised their profit estimates up to 6.5%. US stock market. Profit estimates have been revised up to around 6%, despite concerns about a market slowdown. If we consider the changes in the pending profit forecast since the beginning of the year, the stock markets of each country including South Korea, Taiwan, India and Vietnam.
When all 3 factors are considered together, when the market is worried about recession, if the profit ratio remains unchanged than before, the stock price level will decrease to a lower valuation.
In addition, the downward trend in US interest rates makes it clear that interest rates will be cut significantly from the September meeting, helping the EYG of global equity markets rise. Returns on equities are more attractive when compared to investing in debt instruments. This should be an opportunity to increase the weighting of important investments and get good returns after the market clears up overhyped economic concerns during this period.
If you have any questions about your personal financial planning. Send your questions [email protected] Article by Siwakorn Thonglor CFP® Wealth Manager
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