This week marks the one-year anniversary of 2009’s bear-market low. Shares appear to have found their feet again – the FTSE World Equity index has hit a six-week high and the FTSE 100 an 18-month peak. Better-than-expected US employment data helped, as did the positive reaction to Greece’s latest austerity package. It fuelled hopes that the eurozone can now draw a line under the Greek debt crisis, and underpinned a near-5% jump in pan-European stocks last week. The S&P 500 is up by nearly 70% in a year; the FTSE 60%.
Weak pound boosts the FTSE
The UK economic outlook may be far from encouraging, but the FTSE is benefiting from the slide in sterling. Around 75% of the top 100 blue chips’ sales base is overseas, says Adrian Cattley of Citigroup. So the threat of a hung parliament and a worsening fiscal mess are “more of an issue for the gilt and currency markets”. Indeed, “if the pound falls further, the earnings outlook for UK plc looks better, not worse”, says HSBC’s Kevin Gardner.
For example, one of the major dollar earners, publishing group Pearson, has just reported a 17% jump in annual revenues. But adjust for currency fluctuations and the rise was just 4%, says Neil Hume in the FT. Meanwhile, investors are seeking exposure to fast-growing emerging markets, so international companies such as BHP Billiton and Vodafone are highly prized. The FTSE 100 is “long global GDP”.
Global recovery set to disappoint
The trouble is that the outlook for global GDP is also fraught with risk. In the US, the world’s biggest economy, another 36,000 jobs were lost in February. That continues the recent pattern of “minor losses that look good compared to the bloodletting of early 2009, but rather sad compared to a textbook recovery”, say Philippa Dunne and Doug Henwood of the Liscio Report. We normally see 150,000 jobs added per month by the time two and a half years have passed since the Fed first begins to ease, adds David Rosenberg of Gluskin Sheff.
The turn in the US labour and housing markets is “refusing to arrive”, and most of the numbers coming out of Europe have “disappointed” of late, says Edward Hadas on Breakingviews. Swedish GDP actually fell in the fourth quarter.
A feeble recovery “will only amplify” the challenge to governments “already struggling to find politically acceptable ways to reduce big deficits”, raising the risk that tightening will undermine what little growth there is. A related problem is gradually winding up special liquidity facilities – a process that has already started.
Then there’s the question of when to raise interest rates: “the tricky bit is knowing when the economy, and the financial sector, is strong enough to cope”, says Buttonwood on Economist.com. Given government tightening, broken banking systems and overleveraged consumers in much of the West, recovery will be a long slog once the boost from fiscal stimuli and the inventory cycle wears off. “Get ready for the austerity decade,” says Larry Elliott in The Guardian. A renewed slowdown or shock in the West will also ripple through emerging markets.
Are markets stuck in a range?
With years of lacklustre growth ahead as we gradually work our way out of the credit bust, the medium-term outlook for developed stockmarkets is uninspiring. A Morgan Stanley study of previous major bear markets suggests we’re now set for a range-bound market – albeit in a wide range. That could last five years or more as we work through the structural headwinds we face. That makes it vital to hold solid dividend-payers, says Morgan Stanley’s Graham Secker.
That means holding on to the defensive stocks MoneyWeek has been tipping for some time. As many are international earners, they are currently getting an extra fillip from the weak pound.
The big picture: global trade climbs off the floor
After plummeting at the fastest rate since the Great Depression in early 2009, trade is rebounding. Global merchandise trade volumes grew by 6% between October and December compared to the previous quarter, according to the CPB Netherlands Bureau.
That sort of pace is typical of the decade as a whole. Yet for 2009, volumes were down by an unprecedented 13.2%. And the recent bounce may well fade, given that the developed world is set to struggle. Local tightening measures are likely to temper emerging-market growth too, says Capital Economics. Don’t expect trade to regain pre-crisis levels until at least mid-2011.