Beware of the returning bears

• US President Trump's pro-business and deregulation stance that culminated in the recent significant tax reform may have “kick started” a US-led global recovery in trade and economic growth
• Overall, macro-conditions are generally positive with an unprecedented phase of synchronised growth across major continents
• However, rapid pace of asset appreciation, accumulation of financial leverage and continuing geo-political instabilities pose risks to growth  

At the beginning of 2017, the spectre of a global trade war ignited by then newly elected US president Donald Trump’s hostile rhetoric on global trade loomed large but did not quite materialise. This despite the US pulling out of the Trans-Pacific Partnership and threatening to re-negotiate the North America Free Trade Agreement. Not that it may not happen in the next 12 months or beyond.

Instead, there was a surge in business and investment confidence due to his pro-business and deregulation stance and policies. That has fuelled a resurgent US economy, driven down unemployment and buoyed financial markets, culminating from the significant tax reform in recent history.

The Trump supporters would ascribe it to kick-starting a US-led global recovery in trade and economic growth. In Europe – it has also led to the strongest growth since the global financial crisis. It has helped to strengthen the Euro although improvements in employment have not fully flowed through.

In Japan, prime minister Abe’s efforts in stimulating the economy has finally brought back corporate and business confidence and reflated its long-stalled economy. The emerging markets are also experiencing stronger growth on the back of rising investor confidence and increasing foreign direct investment and capital inflows. Even China that is supposed to be in the middle of a self-imposed economic and financial restructuring overshot its targeted growth rate.

However, significant risks still exist. The volatility index in global financial markets will pick up in 2018 given the rapid and prolonged period of gains in 2017. The longer the current rally persists the higher risks of a severe correction and potential contagion in 2018. Of course, geopolitical risks will continue to cast a long shadow over the markets.

Overall, macro-conditions are generally positive and we are seeing quite an unprecedented phase of synchronised growth across the major continents. So favourable are conditions that some economists are characterising them as “Goldilocks” – just right. Just as in the popular bedtime story, there is a moral and sinister side to it. The cosy conditions do not last long before the “bears” return.

So, it is now a question of how long it will last before the “bears” show up. With the confluence of positive factors will markets be lulled into a state of “excessive exuberance” that numbs the dangers of the current pace of asset appreciation and accumulation of financial leverage, or should this instead be a time to look out for the returning bears?