The world’s stock market slipped into bear-market territory for the first time in more than two years amid concerns that rising interest rates and a persistent Covid-19 pandemic may tip some major economies into recession.
The MSCI All-Country World Index, a benchmark gauge that tracks about 2,900 stocks in developed and emerging markets, dropped 3.7 per cent to 597.64 on Monday. More than US$18 trillion was erased in the 21-per cent slump from the index’s November 16 high, the textbook definition of a bear market.
Global equities are in the second peak-to-trough plunge exceeding 20 per cent since March 2020, as the Covid-19 pandemic remains entrenched in many regions, with resurgent waves in mainland China, Hong Kong and Taiwan. At the same time, central banks led by the US Federal Reserve had raised the cost of money to stem the inflationary pressure unleashed by a decade of zero interest rates.
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The Fed raised its benchmark borrowing costs by 50 basis points on May 4, the most since 2000, to tame the fastest inflation in four decades. Another of the central bank’s bimonthly Federal Open Market Committee (FOMC) meetings is scheduled on June 16, when it is likely to raise its benchmark rate again, part of the 10-step increase through the end of 2023 expected by economists.
“The Fed has the greenlight to tighten as much as possible to get inflation under control,” said Edward Moya, a senior analyst at Oanda. “Inflation will remain sticky and lead to sharply weaker purchasing power and consumption over the coming quarters, and that supports the idea the Fed will be able to move forward with more aggressive rate hikes over the next few meetings.”
The MSCI gauge is dominated by the biggest companies listed in the US, namely Apple, Microsoft, Amazon, Tesla and two classes of shares in Alphabet, the owner of Google. The five companies accounted for almost 13 per cent of the index’s market capitalisation and weight at the end of April, according to MSCI data.
Trading in US stocks has been gripped by rising price pressure and doubts about the Fed’s policy, which is blamed by some investors for being slow in curbing rampant inflation. Concerns have been growing that the US central bank will fail to rein in inflation without derailing growth.
Most stocks on Wall Street dipped deeper into the bear market on Tuesday. The S&P 500 fell 14.15, or 0.4 per cent, to 3,735.48. It wobbled between losses and gains through the day after a couple big companies flexed financial strength with stronger profits and payouts to shareholders.
The Dow Jones Industrial Average fell 151.91 points, or 0.5 per cent, to 30,364.83. The Nasdaq composite rose 19.12, or 0.2 per cent, to 10,828.35 after swinging between a a loss of 0.7 per cent and a gain of 1.1 per cent.
Runaway inflation, which was exacerbated by Russia’s invasion of Ukraine, prompted the Federal Reserve to go aggressive on tightening bias.
China’s flare-up of the pandemic and its gruelling zero-Covid approach have exacerbated concerns about a faltering economic outlook. While Shanghai officially ended its two-month lock-down on June 1 and Beijing has returned to normalcy, the damage to the economy is palpable, with the economy expected to contract this quarter.
Investors’ hopes of Beijing relaxing the zero-Covid policy were dashed when President Xi Jinping last month defended the strategy in a surprisingly hardline tone. Zero-Covid, which includes mass testing and lockdowns in areas with infections, is viewed as a major headwind weighing on the economy and stocks.
While top Chinese policymakers have earmarked 300 billion yuan (US$44.5 billion) to shore up growth, some investors have expressed disappointment in the execution and lack of follow-up. Retail sales and consumption, particularly in big-ticket items such as residential property and motor vehicles, continued to be lacklustre, as rising unemployment and a contraction in technology hirings deterred spending.
JPMorgan Asset Management recommends investors opt for a balanced portfolio between bonds and stocks amid the challenging environment.
“While duration risk is still a short-term challenge for fixed income, the income generated from government and corporate bonds offers a better cushion to offset price volatility from rising rates,” said Tai Hui, chief strategist for Asia at the money manager. “Investment grade corporate debt strikes a good balance between income generation and resilience against slowdown concerns.”
With additional reporting by Cheryl Heng and Associated Press
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