Equity markets have been “rocking and rolling” of late, says David Rosenberg of Gluskin Sheff. US stocks have hit a four-week high. European stocks are at their highest in four months, as is the FTSE 100 following three weekly rises in a row. Stocks jumped again early this week as the new international capital regulations for banks proved weaker than recently expected.
City analysts are now pencilling in a rise of around 10% for the FTSE 100, with UBS and Citigroup expecting the index to finish the year at 6,000. Better-than-expected recent data from America, which leads world markets, suggests “a double-dip recession is less likely”, says Morgan Stanley’s Ronan Carr. Kevin Gardner of Barclays Capital notes that earnings forecasts have been upgraded.
But don’t count on the latest bounce lasting very long. As Capital Economics points out, August’s activity surveys of manufacturing and services, added to industrial production growth of just 0.3% in July, suggest that the UK recovery “may grind to a halt” by the end of the year. And that’s before the fiscal squeeze kicks in. Nor is the British market as attractively valued as “some seem to believe”. Using cyclically adjusted non-financial earnings, which smooths out volatile recent profits, the p/e is around 16. That’s about the average since 1975.
Nor is the global picture encouraging. Even if we don’t get a double-dip, which is hardly a given yet, the US economy is still “extremely weak”, says Rosenberg. The main problem is that consumers, who account for 70% of the economy, are concentrating on paying down their debts. There have now been 17 monthly declines in consumer credit in the past 18 months. This drag on growth won’t end soon – the household income-to-debt ratio is still miles above pre-credit-bubble levels, as Jan Hatzius of Goldman Sachs points out. This implies years of lack-lustre growth.
And double-dip or not, economic momentum is ebbing all over the place, says FAZ.net. The OECD leading indicator points to growth already fading in Britain and much of the eurozone, and being past its best in America and Japan. Fading momentum means earnings forecasts are too high, says Gerald Minack of Morgan Stanley. Given all this, developed world equities look far more likely to trade sideways, or even fall, than keep shooting up from here.