by Tony Lanning, head of multi-manager at Gartmore
As the economy turns the corner towards growth, led by healthy levels of activity in emerging markets, forward-looking investors have become increasingly confident in the prospects for equities.
The FTSE 100, Dax, CAC 40 and Dow Jones indices have soared by around 50% since their lows in early March.
Meanwhile, over the same period, high yield corporate bonds have delivered the kind of percentage gains even equity investors would normally be pleased with, trouncing rock solid government debt since the depths of global economic crisis, a measure of investors’ rampant appetite for higher risk in return for the prospect of much better rewards.
Yet as discussion switches to the sustainability of the improved market sentiment as the global stimulus tap is gradually turned off, the initial signs have been promising.
In early October, Australia became the first of the G20 countries to raise interest rates. However, as confidence in the global economic recovery has grown, stock market investors have become more comfortable with moves to take interest rates back from ’emergency’ towards more ‘normal’ levels.
Having looked on as the German and French economies inched out of recession in the second quarter with growth of 0.3% the UK economy contracted by 0.6% and expectations of modest third quarter growth were also dashed by news the economy shrank by 0.4%.
Though these preliminary figures could yet be revised upwards the UK remains among the laggards of the world’ biggest economies, with the US the latest to emerge from recession during the third quarter. However, the UK market’s recovery from a brief GDP inspired sell off demonstrates investors are prepared to focus on the more promising medium term outlook for global corporate profits.
Notwithstanding the challenging economic backdrop during the second and third quarters many global companies have positively surprised on earnings, despite generally disappointing sales, suggesting companies are controlling costs and managing inventories more effectively.
As the global economy emerges from recession, the outlook for corporate earnings has improved considerably since the first quarter. Though the US Federal Reserve has flagged the end of its quantitative easing programme, the broad consensus remains the global economy should continue to benefit from ongoing stimulus, with interest rates likely to remain at accommodative levels. Against this, we remain confident the improving trading backdrop should provide fresh support for equities into 2010.