With the Dow Jones Index breaking back through the 10,000 mark, we have reached a real milestone for equities. At the same time, the FTSE 100 has pushed comfortably through the 5,000 level. Thus the Dow Jones and FTSE 100 have risen by 11% and 15% in local currency terms since the beginning of 2009 and by 46% and 44% since March.
Investors face the prospect of very low returns on cash deposits and have clearly fuelled rises in the price of most risk assets this year. Bonds and commodities have moved up strongly too.
Can equity markets continue at this rate? Certainly there is clear historic proof that the market recovery will continue for some time yet.
The markets have rallied because of the huge support provided by World Governments to the financial system and we have two statements from central bankers demonstrating that commitment will remain in place for some time.
“I believe that policy makers should err on the side of caution as they decide when to exit from their crisis response policies.”
Dominique Strauss-Kahn, Managing Director of the International Monetary Fund speaking in Berlin on 4th September 2009
“It is far too early to talk about an exit strategy. The economy may face a bumpy road ahead”
Liu Mingkang, Chairman of the China Banking Regulatory Commission, speaking in Hong Kong
So, our view on equity markets has shown to be right. It is possible, even now, to buy shares with an income higher than that paid on UK gilts. Surely it is better to invest in strong business with the prospect of growing dividends than with the Government at a fixed (and very low) rate.
The fear remains that the economies of the UK, USA and Europe will struggle to grow under the burden of the support provided by their Governments to financial markets. That burden is much lower in the emerging markets hence our long term view that those are the areas to look for growth.
And the threat of inflation? In our view it is still there but perhaps two or three years away. In the meantime, with interest rates set to remain low the outlook is good for risk assets.
Author: Graham Barnes
Highlights for October 2009
- Evidence that the US is exiting recession boosted by upbeat retail sales and housing data
- US dollar remains under pressure
- In Europe improving economic outlook and better-than-expected earnings results provide support for equities
- Strength of the euro currency remains an area of concern for the region’s exporters
- The FTSE 100 index rallies through the psychologically important 5,000 for the first time since October 2008
- Economic data less buoyant as reflected by a further rise in unemployment levels
- Equity markets in Asia ex-Japan extend their recent rally
- Japanese stocks lag due to political concerns and possible regulatory changes to the banking sector
- Double-digit monthly returns in several countries, including Brazil and Russia
- UK corporate bond market posts sixth consecutive month of positive returns