Global market developments

- Editor


The MSCI World in local currency terms declined 2.2%. During the month, investors digested earnings results and leading indicators of global economic growth lost some upwards momentum. A retreat in US consumer confidence highlighted the vulnerability of the economic recovery with unemployment rates continuing to rise.
There is still a relatively high probability that economic momentum could wane when government stimulus is removed. Investors have been cautiously watching housing activity ahead of the expiry of the US government’s first home buyer’s grants at the end of November. US auto sales have moderated since the US government’s cash for clunkers program expired at the end of August.

However, key policy makers at the November G20 meeting, while noting that “economic and financial conditions have improved”, agreed to “maintain support for the recovery until it is assured”. With relatively benign inflation risks, we suspect governments would prefer to exit stimulus plans too late rather than too early. Central banks will typically want to be pre-emptive if possible, like the RBA, but we believe will err on the side of caution in this cycle.

We are becoming increasingly confident that we are in a sweet spot for equities. Economic momentum is such that the global growth will be sustainable, but with uneven outcomes. Emerging economies lead by China and India will deliver the strongest growth, and commodity based economies such as NZ and Australia will benefit. The fragility of the western consumer will keep bond yields low and accommodative policy in place. The risk for equity investors may now be that a “V” shaped recovery does eventuate and surprises in strength and speed. This could result in an earlier than expected policy exit.

The carry trade remains firmly in place with speculators and investors still prepared to use the US dollar as a funding currency for riskier investments in equities, commodities, high yielding currencies and emerging markets. We don’t expect this to end until the Fed removes the punchbowl. Investors will be watching economic data and comments from the Fed, over coming months, for signs of when this might begin.
While risk premiums have snapped back in line, we don’t think current PEs are anything to get too concerned about just yet. It is not uncommon to see PEs expand ahead of an earnings recovery. Third quarter earnings season is about to conclude on a better than expected note. We are yet to see outright growth in revenues or earnings overall, but due to base effects and rising leading indicators, positive growth is likely to resume in the fourth quarter.

New Zealand

The Reserve Bank of New Zealand left interest rates unchanged and reaffirmed that it would wait for the second half of next year before raising interest rates. Reserve Bank governor, Alan Bollard said “We see no urgency to begin withdrawing monetary policy stimulus and we expect to keep the cash rate at the current level until the second half of 2010”.

The unemployment rate rose to 6.5% from 6% in the third quarter, the highest level in more than 9 years. If unemployment continues to rise, consumers could hold back on their spending plans, and mute the economy’s recovery.