FYI | May 16 2007
Inflation rates appear to be in decline all across the globe these days helped by the fact that many countries had elevated CPI readings this time around last year.
At the same time global liquidity remains vibrant and abundant, feeding cash to private equity, carry trades, hedge funds and into promising assets in general. Expect global risk appetite to gradually increase over the next few months, and asset prices to bounce back swiftly in case of any intermediate pull backs.
Yes, there seems to be a strong case for another price correction for base metals, and equally so for equities in the US, in China, and in Australia – but it is difficult to see asset prices remaining subdued when global economic growth (outside the US) remains on a solid path and yields on bonds stay low.
As things stand now, there seems to be no reason why bond yields should not remain where they are (and move even lower as time goes by). The effect on share price multiples, and investors’ risk appetite, may well be of such a magnitude that in a while from now market commentators around the world can start using terms again like “irrational exuberance” – for such is the nature of the human beast when there is money to be made.
In case you hadn’t drawn the conclusion yourself yet: this bull market is far from over.
The usual dangers are still around but they are being happily overlooked by the markets who are clearly taking a positive view on things: inflation may well return later in the year (but for now it seems under control), economic growth in the US may well deteriorate further (but a recession is being dismissed at the moment) and the Chinese share market may well implode, or the authorities may step a bit too hard on the brakes – but they haven’t thus far, have they?
Many an economist seems convinced the US will churn out ongoing disappointing economic data over the next six months or so. For investors worldwide this could be a continuation of the good news story, as sluggish economic growth in the US is likely to keep the inflation monster in the bottle. This means the current factors behind the global asset revaluation are likely to remain in place.
Of course, as we’re balancing on a fine rope between bad news, not so bad news, and a little bit worse news we are likely to see volatility spike in the times ahead. Nobody wants to be in the market when the US economy tumbles into a recession and it is very much likely that we will be reminded of the fact that this danger is still around.
But, as global strategists at highly regarded BCA Research stated this week: “In the end, soft U.S. economic growth will ultimately act to prolong the expansion [of the global economy] and sustain low inflation, both of which are supportive of a re-rating of equities.”
BCA is firmly bullish on global equities within the current environment, emerging markets in particular (the forecast for US equities is for a return in single digits only).
BCA rightly states the challenge for economists, strategists and the markets in general will be to get a grip on what will happen beyond the next six months.
For all we know now, all three aforementioned major dangers will still be present then, but within a different overall environment.
Seems to me the odds are in favour that 2007 is likely to add another window to the bull market that started in 2004. 2008 seems a bit more challenging, from a distance, but didn’t we hear the same about 2007 this time around last year?
The Dutch have a saying which I thought fits in perfectly with the current situation: Vraag niet hoe het kan, maar geniet ervan.
(Freely translated this becomes something like Don’t ask how it can be, but enjoy!)
Enjoy!
Your “always make sure you can sleep well at night” editor,
Rudi Filapek-Vandyck
(as always firmly supported by the Fab Three: Greg, Chris and Terry)