Global markets round-up

- Editor


The MSCI World in local currency terms rose 3.1% in September and is now up 23% year-to-date and some 60% off the March lows. The current level for the S&P 500 index has exceeded the average year-end forecast of 9 out of the 10 Wall Street strategists surveyed by Bloomberg.

Global sovereign bond markets rallied in September for a second consecutive month, highlighting the divergence of opinion about the prospects for the global economy. Bullish equity investors believe the US economy will emerge from recession and growth will resume meaningfully in 2010. Buyers of bonds say concern about jobs and the housing market will keep consumers from spending in any sustained way, keeping interest rates low for an extended period of time.

It is not uncommon in this stage of the cycle to see markets climb a “wall of worry”, with concerns centred on the strength of the recovery in the US. As long as economic momentum remains positive and equity markets continue to rally, bearish investors will scramble to catch up. But momentum will only carry the market so far, and is not a good reason to buy stocks alone.

The third-quarter earnings season begins this month and profits will have to be well above analysts’ estimates to justify higher stock prices. In particular, there will need to be evidence of revenue growth, not just cost cutting, to generate further profit recovery. Since March, the S&P 500’s valuation has doubled to 20 times reported earnings. At this level, the equity market is no longer cheap. However, it is not yet expensive either assuming earnings grow further in 2010.

Markets have also been buoyed by optimism that there could be an increase in M&A activity. Last month we saw Kraft Foods Inc. make a bid for Cadbury Plc and Walt Disney Co. acquire Marvel Entertainment Inc. Large companies are sitting on high cash levels meaning acquisitions are ready to be made as executives’ appetite for risk improves.

Policy makers in recent speeches have been debating the timing of an exit from the central bank’s unprecedented intervention into the economy and expressing concern the economic recovery is not yet robust enough to go it alone. Various central banks and fiscal authorities warned of the risks of the premature removal of stimulus. For example, minutes from the September Federal Open Market Committee meeting (FOMC) revealed that the US is still some way from tightening monetary policy. The key message from the G20 meeting of policy makers was that the stimulus would remain in place until the economic outlook warrants its gradual removal. However, there are moves are afoot. The Reserve Bank of Australia was the first developed country central bank to begin lifting rates – the result of Australia avoiding recession and being a direct beneficiary of China’s recovery. China itself is likely to start reining in credit growth in the near future.

We remain cautiously optimistic in the short-term recognising that stocks will outperform cash and bonds as the global economy emerges from recession. However, we are acutely aware that PE multiples have already expanded in anticipation of a recovery in corporate earnings. We don’t expect inflation to be a major problem for some time yet, and as a result, aren’t too bearish on bonds either.