Patrik Schowitz

Macroscope | As the US economy recovers from Covid-19, could markets’ best days be behind them?

Consider China, which has been leading economic trends during the pandemic. GDP growth reached a high point in the first quarter, but is now likely to slow and Chinese equity markets are reflecting this

Reading Time:3 minutes

Why you can trust SCMP

People sit in Union Square in San Francisco, California, US, on February 17. The Fed remains unlikely to raise interest rates until 2023. Photo: Bloomberg

Patrik Schowitz

Published: 2:30pm, 30 Apr 2021Updated: 2:30pm, 30 Apr 2021

With some parts of the world seemingly beginning to conquer the pandemic, an even more remarkable rebound has taken place in financial markets, where global equities have gained more than 80 per cent from just over a year ago.

The relationship between economic growth and financial markets can be messy but, generally, markets perform best when activity and profits are accelerating. In fact, whether the pace of growth is increasing or declining can often be more important than whether conditions are perceived to be good or bad.

This is one major reason markets did so well over the past year – despite enormous real-world and public health challenges, they were reacting to expectations that the worst of the economic pain might be past, even if the world was still a long way from normal.

However, optimistic forward thinking can only get markets so far. With a surge in growth hopefully just around the corner, and indeed already in full swing in some economies, have markets already priced in all this progress?

As has been the case throughout this crisis, the Chinese economy is leading economic developments. The huge 18 per cent year-on-year GDP growth rate it achieved in the first quarter – admittedly flattered by comparison to the worst phase of the Covid-19 crisis a year earlier – almost certainly represents the high point in China’s rebound. Growth will surely slow to a more sedate pace from here.

02:01

China’s economy expands record 18.3 per cent in the first quarter of 2021

Chinese equity markets have certainly been forward-looking and reflected this anticipated slowdown: after surging some 45 per cent from around the middle of last year to its peak in February, the Chinese A-share benchmark CSI 300 index has fallen back by around 12 per cent.