Despite ongoing economic crises around the world, global stock markets have remained resilient so far this year. However, one veteran strategist warns that this disconnect between geopolitics and equities won’t last forever. David Roche, president and global strategist at Independent Strategy , said equity markets were still relatively buoyant “because people are stupid” and overly complacent. Roche pointed to a number of concerning developments that the market seemed to be ignoring. These include slowing growth in China , sanctions hitting the Russian economy, high inflation in the West requiring profit margin compression, and social unrest in emerging markets. “Equity markets are up there because they think these things are not related. They are related,” Roche told CNBC’s “Squawk Box Europe” on Thursday. He also suggested assets to own before markets begin pricing in the risks. China and Russia risk The Chinese property sector has been reeling since 2020, when Beijing cracked down on the debt levels of property developers, leading to several high-profile bankruptcies . Wall Street bank JPMorgan raised its default forecast for emerging markets’ high-risk debt last week primarily due to rising contagion fears around China’s property sector. Roche said China’s demographic decline over many decades meant the country did not have “the amount of young people which would justify a renewal of the housing cycle.” “They can’t get that engine motor of growth going again,” he added. Meanwhile, in Russia, Roche noted that “the economy is starting to look like it’s really getting hit by sanctions now.” The G7-imposed price cap on oil exports from Moscow has led to declining tax receipts for President Vladimir Putin’s government and a sell-off in the Russian ruble. There are concerns that Moscow might respond by raising geopolitical tensions globally. Inflation risk In the West, central banks are aggressively raising interest rates to combat inflation. This is squeezing company profit margins and threatening to push economies into recession. “Much longer higher interest rates means that they actually have to squeeze profit margins in order to get inflation figures to come down,” Roche said. Roche believes slowing earnings growth will be the catalyst that finally causes a significant stock market correction. “It’s because [investors] think these things are not related. They are related. They’re related in the growth of equity earnings which is the only justification for the level of the markets, and you know you’re not going to get it,” he said. In Roche’s view, investors have become overly optimistic after years of easy monetary policy and strong returns. Now that global growth is slowing while interest rates rise, he thinks a reality check is coming. “When the correction comes, when people realize that profits are part of the adjustment to lower inflation, and when they realize that all these problems that you see from Latin America … and when you look at the problems in China, I think the downside in markets is very big, still, at these levels and they’re not priced for it,” Roche said. What to buy? With bonds and cash now providing positive real returns, Roche believes investors don’t need to take excessive risks in the stock market. “I would buy U.S. Treasurys here,” Roche said, adding that despite all the rhetoric, the dollar and U.S. government bonds were still viewed as safe-haven assets during market stress. The strategist suggested owning 30-year U.S. Treasurys , which were trading with a yield of 4.35% Friday. Roche also believes 30-year bond yields will not rise beyond 4.7% in the coming months. When yields rise, bond prices fall. “It’s an old story, but I would slowly accumulate Treasuries at these levels. I’m not in any panic mode about it,” he added. Earlier this month, billionaire investor Bill Ackman said he was betting against 30-year U.S. Treasurys in “a world with persistent 3% inflation.” Ackman, the founder of Pershing Square Capital Management, said that if U.S. inflation is 3% in the long term instead of 2%, 30-year Treasury yields could hit 5.5%, “and it can happen soon.”
