PineBridge: This is markets’ single most important driver right now

World currencies

The foremost fundamental change in the markets this year, and the single biggest driver of market moves, is tighter financial conditions, Omar Slim, portfolio manager for fixed income at PineBridge Investments, said on Wednesday.

He noted that 2018 has been one of the worst years in the past century for the number of asset classes which are down so far this year, adding that it’s not the degree of decline, but rather the number of asset classes. That has made 2018 nearly the exact opposite of the 2010-2017 period of “throw the dart anywhere and make money,” he said.

That market milieu could persist, Slim said at a press conference in Singapore by PineBridge, which has US$91.4 billion in assets under management.

“If tighter financial conditions is an important driver, the most important driver or one of the most important drivers for market action or driving the markets, then this is something that could potentially stay with us for the foreseeable future,” he said.

Slim pointed to not just expectations for further interest rate hikes from the U.S. Federal Reserve, but also to the likelihood that the European Central Bank and the Bank of Japan would start following the Fed’s footsteps next year.

“We might be in a situation where we go from 2010-2017 where decent growth, okay economic growth, is enough for monetary policy to remain either accommodative or very accommodative or ultra-accommodative, we’re moving into an era or phase where decent-enough economic growth, decent-enough inflation is potentially enough of a reason for monetary policy normalization to continue,” Slim said.

“This could potentially be capping the performance of some of the asset classes,” he said.

Slim noted that some of the worst-performing currencies this year — Argentina’s peso, Turkey’s lira, India’s rupee and Indonesia’s rupiah — all have external-funding vulnerability, or the need to borrow outside the domestic market. Tighter financial conditions would make them among the hardest hit.

Elizabeth Soon, head of Asia ex-Japan’s equities at Pinebridge, also pointed to another potential reason for tighter policy ahead: The U.S. trade war could soon push up consumer price inflation.

U.S. President Trump has imposed tariffs on US$250 billion worth of Chinese goods imported into the U.S. and Bloomberg reported last month, citing unnamed sources, that he has threatened to impose tariffs on the remaining US$257 billion if China doesn’t cave to his demands. The tariff rate on the US$250 billion worth of goods is set to rise to 25 percent from 10 percent in January.

Soon said that based on her conversations with China’s manufacturers and private equity, companies are considering moving production out of China.

But she added that China’s manufacturing sector isn’t dependent on low-end production like it was 20 years ago, and that while low-end producers are looking to move to places such as Vietnam, Bangladesh and Cambodia, the high-end, which accounts for much of the mainland’s manufacturing now, wasn’t likely to budge.

Soon said the common feedback was that it would take at least three years for a high-end manufacturer to build a plant and then the logistics of sourcing would need to move as well.

“That’s not going to happen,” she said. “The common thing that’s talked about: The consumer has to take the higher prices.”

Indeed, a Reuters article this week noted that since Trump imposed tariffs on steel early in his administration, users of steel in the U.S. have seen prices spike higher, and they expected to need to cut jobs ahead.

Higher prices for U.S. consumers will likely encourage the Fed to stick to its plan to gradually tighten monetary policy, and could continue to dampen market sentiment.