Mixture of celebration and caution
Fresh highs are being reached in f inancial markets across the globe with America’s economic rebound, the fiscal stimulus in Europe and economic figures in China being revised positively. The strong dollar has also wrought less damage on US corporate profits than was expected.
Leon Kok spoke to Stanlib director and offshore expert Paul Hansen about how this is all being played out. Indeed. A good performing market is not necessarily a mirror of a good performing economy. Europe, Japan, South Africa and perhaps even China are interesting examples.
Q: The MSCI World Index’s hitting a record high ref lects a revival of the sixyear global bull market, supported by most other leading bourses. The current US bull market is the third best ever.
The FTSE 100 in London is at its highest since 1999. Important to note today though, is that the index is very different to what it was then. It has become globally diversified compared with a mainly domestic focus.
In Europe, the Dow Jones Eurostoxx 50 is at a seven-year high and up 13% this year. However, it’s still about 34% below its al l-t i me record i n 2000. Record highs have been hit in Germany and France is doing well. The Japanese market, meanwhile, is at a 15-year high and up 7% alone this year.
Domestically, the JSE Top 40, also at a record, has risen 12% in rand terms in
the past five weeks.
Q: At this stage there is no reason to believe that it ’s about to end. Interest rates remain very benign. Inflation is benign. The battle against deflation will probably be won. So relative to bond yields and cash, equities is the obvious place to be.
We still like offshore property which is yielding about 3% plus a year.
Q: Not necessarily so, but nor are they cheap. In the past six weeks, we’ve had more positive surprises in Europe than negative surprises, but in the US positive surprises have dipped a bit. There could be a lot of upside in Europe yet.
Economic growth in Germany during the last quarter was 1.7% compared with 1.3% previously. The credit impulse in Europe is beginning to move up nicely – so credit is picking up and along with it demand.
In addition, quantitative easing has started, though don’t expect it to be as directly positive as it was in the US. But it will have some effect.
Q: We’re impressed with the new leadership in India and very positive on it. Every day you read of changes for the good. The IMF expects India to surpass China’s growth in about a year.
China’s growth can be expected to slow down to 5%, but we’re still bullish on its stock market. Significantly, the MSCI China Index in dollars is currently trading where it was 19 years ago. These are mainly companies trading in Hong Kong. Besides, it has moved into an uptrend which could go a long way.
India, China and much of South East Asia are big importers of commodities and exporters of f inished goods to the US, earning US dollars which should be good for the region generally. China has let its currency weaken by about 3% against the dollar over the past year.
Q: Yes, in all probability, though the market could be very volatile this year. The JSE for all intents and purposes follows global markets. Obviously, we have issues in SA, but they’re generally over-shadowed by global markets. The bull market is alive.
Q: We like financials and banks, and we like IT. But we think that it’s also time to switch from the non-cyclical sectors to cyclical sectors like autos.
Hospita l s a nd pha r maceutica l companies are interesting, but they’re stretched and you need to be careful about t hem. We’re not sure about mining, though iron ore prices are likely to remain soft for a while and there is an over-supply in oil. Prices could still go down to $30-$40 a barrel.