23 February 2024
The European Central Bank (ECB) reported its first annual loss in nearly two decades, amounting to €1.3 billion ($1.41 billion) for 2023, as disclosed in its recent financial statement.
This loss highlights a significant shift in the equity markets, with country rotation observed since 2020-21. Emerging markets are emerging as key players in this decade, mirroring the dominance of developed markets, particularly the US and Europe, from 2008-2020.
The reversal in market dynamics was evidenced earlier by changes in interest rates and commodity cycles, with emerging markets gradually outperforming developed ones.
Presently, fundamental indicators are beginning to reflect weaknesses in developed markets, aligning with the observed market trends.
A notable counter-example is seen in Japanese markets, which have reached 40-year highs despite a -0.4% GDP contraction. This suggests that equity prices may anticipate or precede fundamental economic indicators.
We anticipate that Japanese equity markets could foreshadow upcoming fundamental GDP growth, which may manifest in future GDP figures over the coming quarters.
Contrary to popular belief, this illustrates that equity prices often lead fundamental indicators, challenging the notion that fundamentals exclusively drive market trends.
Consequently, relying solely on fundamental analysis for investment decisions may result in entering the market late in the cycle, emphasizing the importance of considering both macro economic trends and fundamental indicators.