Equity markets have continued their upward trend since the start of the New Year. Does this renewed confidence for risky assets merit a new found faith in the general world economy or is the idea of rotation out of overpriced, safer perceived assets such as US or UK Government bonds or German Bunds finally gaining traction. What do investors think has changed with the World economy or the investment climate for it to last this time?
Maybe simply that in a poor or sluggish global economy everyone realises that life goes on and that waiting 10 years or more for things to improve gets you nowhere. With low yields now typical on many US treasuries or UK gilts with prices well above their par value or redemption price, gold still a useful hedge yields nothing and is up considerably since 2000 and cash returns you virtually nothing. The safely perceived havens may no longer be the place to generate a decent return as they have done in the last few years of economic stress and fear. (I wonder if the pension companies will change their standard projections of 3%, 7% and 9% approx. for the life pension plan. Quite how future returns materialise with buying assets with a 2% yields escapes me. Perhaps something else must be getting bought too.
Each morning 7 Billion people wake up and go about their day so things that drive demand may happen. Economic growth in countries like China, Singapore, Brazil and even places like Angola should continue to provide a positive growth story tempered by aging and debt ridden Europe holding matters in check to a varying degree over the coming years unless of course bold steps are taken – difficult though not impossible. A recovery US housing market also contributes to a positive impetus to the global growth story in 2013 – albeit with many homes still in foreclosure or worth less than their mortgages. US natural gas prices are low thanks to the US shale gas development boom. This again helps recovery and sentiment, plus it is an important factor in the longer-term political economic progress of the USA with geo-political implications. If trader’s comments are correct – China, depending on the accuracy of the state statistics or belief in economic indicators such as iron ore imports and electricity usage, appears to be regaining momentum. Maybe the equity rally is for real this time and not just something to do in January on the LSE or Wall Street.
The optimism may of course all blow over by say March and difficulties – whether in the debt markets of Europe or the political battles and clashes all over northern Africa or with Israeli elections again looming trouble – may emerge all to easily unsettling fickle investors’ resolve with prospects for global trade and rising profits and dividends payments on ordinary shares.
Let’s hope not and enjoy it while it lasts. Problems are there to be solved and difficulties there to be overcome. As the upside lifts people out of poverty and brings prosperity, health and happiness – of a material sort anyway. So the question for me, and investors in general, is if the rally continues then when should you take profits or when should you run for winners to emerge. At the moment though it is good to see a fresh breeze for equities and let’s hope it doesn’t turn bitter and wintery like the weather here in the UK at the moment.
LDC
Coming soon in 2013: UK strengths and opportunities, and a little to learn from tribes…