“That popular old adage, ‘sell in May and go away’, has never seemed so prescient,” says Simon Smith of FxPro. Equity markets have been edging downwards since they reached post-crunch highs last month. And given the increasingly overcast outlook, the trend may well continue.
For starters, the global economy appears to be losing momentum. Following America’s lacklustre first-quarter growth figures – 1.8% on an annualised basis, down from 3.1% in the previous quarter – analysts have scaled back growth forecasts for 2011. Nobody is expecting 4% anymore, notes Daniel Eckert in Welt am Sonntag. According to Bank of America Merrill Lynch, 2.5% is more realistic.
The eurozone has just posted a surprise growth spurt, but this is probably “as good as it gets”, reckons economic forecasters IHS Global Insight. Much of the zone is set to cut spending and raise taxes this year to reduce “bloated budget deficits”.
Meanwhile, still-high unemployment will keep a lid on spending. Recurrent sovereign debt jitters are likely to hamper confidence and raise interest rates for the periphery. Most emerging markets, notably China, are still tightening to squeeze out inflation. This “might soon begin to affect business confidence in the developed world”, says Jeremy Grantham of fund management group GMO.
The problem is, “inflation is real and here to stay”, notes Robert McAdie of BNP Paribas. US inflation has just reached a near-three-year high of 3.2%, while prices are rising in Britain and the eurozone. With commodity prices still high and growth shaky, “stagflation is the biggest risk for the markets”, says McAdie.
Earnings momentum is also cooling. Globally, profit downgrades have outnumbered upgrades of late. And profit margins on both sides of the Atlantic are at “extraordinary” levels compared to the long-run average, as Tony Jackson points out in the FT. Margins tend to revert to the long-term mean, so there is little scope for them to rise further. “If it’s too good to last, it won’t.”
Other risks include the potential for Middle Eastern upheaval to spread further across the region and the end of the Fed’s money-printing programme (which has buoyed all markets). Also, the US market, which sets the tone for the world, is expensive. All in all, reckons Grantham, it’s time to “lighten up on risk-taking”.