And, with economic growth and profits likely to remain subdued while interest rates will probably rise, it seems the current toing and froing will continue for a while yet.
Equity markets pushed strongly in March – the FTSE World Index rose 3.6% – but are still struggling to break new ground on a longer view. The latest rally was nothing more than another move through the trading range occupied since last November.
Rising economic growth and an easing of disinflation should continue to support equities, but we expect progress to remain erratic. Subdued economic growth is likely to translate into subdued corporate profits growth, and in many markets there still seems to be too much optimism in earnings forecasts. Rising interest rates and higher bond yields will place some restraint on the scope for revaluation.
Overall, UK data has recently reflected the two-track behaviour of the economy – retail sales grew by more than forecast in March, while a fall in industrial production disappointed optimistic expectations.
The US may be leading the global economic recovery, but whether it will generate the superior profits growth necessary to justify the market’s relatively high valuation is less clear.
The rest of the world is not far behind in the economic cycle and is generally less defensive than the US. Technology is the major cyclical play in the US, but the risk remains that current problems are structural as well as cyclical and it is difficult to argue that this is priced in yet. The signals from directors’ share dealings is that corporate America has little confidence so far in the upturn.
In Japan, the market has not hit a brick wall after the end of the financial year. Continued optimism relies on investors’ increasing willingness to ignore current economic data (which remains unimpressive) in favour of the evidence from leading indicators, and to focus on this year’s expected profits growth rather than last year’s disappointments.
Market comment supplied by Britannic Asset Management Ltd. Tel. (0141) 222 8000. Expressions of opinion contained within this document are subject to change. Britannic Asset Management Ltd is the holding company of Britannic Investment Managers Ltd (Regulated by FSA).
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