NEW YORK: Even as US stocks flirt with records, investors are staring at a cross-asset landscape that hasnt been painted with this much red since the depths of the financial crisis.
The dollars upswing, brewing price pressures and cracks in the synchronized growth story have pushed asset returns into negative territory across much of the world.This year is on track to deliver the lowest share of positive returns adjusted for inflation across 17 major asset classes since 2008, according to Morgan Stanley.Real yields are on the verge of breaking into a higher post-crisis range, threatening more damage to besieged portfolios.Only the Russell 2000, SP 500 and US highyield bonds some of the most expensive asset classes around have provided unhedged investors shelter from the storm in dollar terms.There always seems to be a level of griping, on both the buy- and sell-side, that conditions are challenging for one reason or another, Morgan Stanley strategists led by Andrew Sheets wrote in a report on Sunday.
But this year it really seems to be the case.The Federal Reserve is poised to usher in a new era of real policy rates this week.
Longer term inflation-protected Treasury yields hit their highest since 2011 on Tuesday.
Real rates play a key role in discounting projected corporate earnings.The investment landscape marks a volte-face from 2017s Goldilocks regime, characterized by subdued inflation, a synchronised global upswing and a clamor for yield that pushed emerging-market assets higher.Rising short-term rates adjusted for inflation are now allowing portfolio managers to satisfy their craving for yield lower down the risk spectrum, while increases at the long-end challenge equity valuations.Were big believers that real rates matter most for risk markets, as its the rate over and above inflation that matters most for discounting future cash flows, the banks strategists write.
As invincible as the United States equity market has been, it hasnt had to confront a different rate regime.Recent price action provides solace for bulls.
The SP 500 notched a fresh record while US financial conditions have loosened from June levels even as 10-year real rates have climbed.
Resilient risk appetites, a still-low effective cost of capital and stellar earnings have powered American assets across the board.And the beaten-up emerging market complex has defied the rise in the discount rate, with bargain-chasing real money investors shifting back into debt products and bearish voices in retreat.
A Bloomberg currency index that tracks developing-market returns from carry trades is up nearly 2% this month on the heels of its worst month in over six years.