As the bank points out in its latest Thundering Word note: “the combined market cap of Google and Amazon is now equal to the combined free-float market caps of all companies in the MSCI China and India indices.”
There are, however, reasons for this to be the case, especially with regards to China, which has been the epicentre for much of global financial market’s volatility in the past 12 months, and there remain a number of reasons to think that such a scenario is likely to continue for the foreseeable future.
Prime among these is the path of the Chinese currency. While the renminbi has already taken up a significant number of column inches this year, Sunday’s foreign exchange reserves announcement is liable to generate even more.
For BAML, the forthcoming announcement could see markets move considerably. Although structurally bearish on emerging markets, the bank said if the data comes in better-than-expected, “We think a bear market rally is likely to be vicious”.
"Fears that its cheaper exports will ‘steal’ growth from other countries will likely grow. And, with it, their ‘humiliation’.
But, it added: “We remain sellers into strength in coming weeks/months of risk assets until we see a coordinated and aggressive global policy response”.
A new equilibrium
Societe Generale is even less positive, pointing out in a note earlier this week, that while the People’s Bank of China continues to insist it has no intention to devalue the yuan, its FX reserves are not unlimited, or indeed, sufficient if the large level of capital outflows seen in recent months continue.
“The Chinese authorities will likely keep tightening capital account restrictions, but the risk is that the tightening might not be sufficient. Our central scenario (65% probability) envisions USD/CNY reaching 6.80 in 2016 in a largely gradual and controlled manner, but there is a large and growing risk (c.35%) that USD/CNY trades up to 7.50 this year,” the bank wrote in a note by its cross asset research team.
And, SocGen’s team points out, while such an occurance would not in and of itself move the global growth needle: “the potential spill-over effects from an uncontrolled move in this direction leave us comfortable to stick with a zero weight on Chinese assets, with only indirect exposure to China equities through MSCI EM index, until the yuan reaches a new equilibrium.”
