Macroscope

4 reasons investors are optimistic despite threats to global economy

It is easy to be pessimistic about the world, yet stock markets have hit record highs

Borrowing costs are coming down, growth is stronger than expected, tech stocks are thriving and investors are taking a glass-half-full approach

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A man looks at an electronic stock board showing Japan’s Nikkei 225 index at a securities firm in Tokyo, on May 27. Photo: AP

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 4:30pm, 30 May 2024Updated: 4:31pm, 30 May 2024

It is easy to be a pessimist when the world feels so bleak. Geopolitical threats have not been this severe in decades and are bound to intensify amid rising momentum in the shift from a unipolar system based on US leadership to a multipolar one in which a diverse group of powers compete for influence.

While the United States remains the undisputed financial hegemon, it is also the main source of volatility in markets as the Federal Reserve – the world’s most influential central bank – works to determine whether it has kept interest rates high enough for long enough or has held them too high for too long. The Fed’s insistence that its policies are “data dependent” will continue to fuel uncertainty due to the bumpy path towards low inflation.

Other threats include the acute structural challenges facing China’s economy, the unpredictable outcome of the US presidential election in November and, crucially, the possibility of an unforeseen systemic financial shock or “black swan” event which shatters confidence in the global economy.

Yet despite all these risks and vulnerabilities, a sense of optimism permeates markets. While it is often hard to disentangle complacency from bullishness, sentiment has not been this upbeat since the end of 2021, according to the results of Bank of America’s latest global fund manager survey.

The MSCI All-Country World Index, a gauge of global stocks in developed and developing economies, has gained 25 per cent since October 27 despite a sharp decline in the first half of April because of concerns the Fed will struggle to ease its monetary policy this year. Even a version of the gauge of global equities that excludes the popular technology-heavy US market is up 19 per cent.

The Hang Seng Index is displayed on an electronic monitor in Central on May 13. Photo: Sam Tsang

According to Bloomberg, 14 of the world’s 20 largest stock markets hit record highs recently, including in the UK, Germany and India. Moreover, it is not just equities that are performing well. Spreads, or the risk premium, on US investment grade and high-yield corporate bonds are now lower than they were in January, when markets expected the Fed to cut rates aggressively this year.