The tightening of financial conditions is likely to lead to a “phase shift” in world markets during the second quarter, leading to lower overall returns and boosting stock growth on the stock, according to UBS Group AG.
The shift from one liquidity-driven market to another based on growth and gains will come as enthusiasm for inflation peaked and will precede any reduction in Federal Reserve support, strategists wrote Monday. Bhanu Baweja. This regime change will be marked by a decline in real rates and credit spreads, which will signal the end of the “headwind” of liquidity, they said.
“While these changes do not imply a major reduction, they do make a significant change in the nature of the rally,” the strategists wrote. “Liquidity tailwinds have been the main contributor to market gains.”
There has been a recent increase in real U.S. yields alarm among investors who see negative real rates as the cornerstone of the risk-asset concentration that has sent global stocks to all-time highs. The rate of 10-year Treasury inflation-protected securities jumped to 0.77% last week, up from 1.08% on February 11th.
Although higher real yields indicate that the economy is gaining strength, they can lead to a tightening of financial conditions and a change in asset allocation.
“A small increase in real rates will probably not be a big concern, but as real rates accelerate, each incremental move becomes more difficult for markets,” Baweja and his team wrote.
The increase in real returns is canary in the coal mine for risky assets
An analysis of similar historical “phase changes” when liquidity boosters move to neutral flow suggests lower market returns and growth stocks marginally outperform value stocks, UBS said. Dollars tend to see modest gains against emerging market currencies and a rotation outside the U.S. toward other markets becomes less convincing, strategists wrote.