Weekly Market Update by Oliver Wallin of Octopus Investments
The strong start to the year continues and it’s been another positive week for global equity markets. The bulls are still in charge, it seems. Although markets dipped briefly on Wednesday there was a strong bounce back on Thursday, thanks to a steady stream of positive newsflow, particularly from the US.
The US debt ceiling negotiations continue to rumble on in the background. However, with a few more weeks yet before that problem comes to a head, investors have been afforded the luxury this week of being able to savour encouraging fundamental data on the US economy and also an encouraging start to the earnings reporting season.
First came the news that unemployment benefit claims in the US are falling, down by 37,000 according to the latest report, and to the lowest levels seen in more than five years. The house building market is also looking brighter, with a significant surge in new house builds and a sharp increase in new construction jobs recorded in December.
The news on the corporate front is also more upbeat, with a brisk start to the earnings reporting season. It’s still early days, of course, but of those companies that have already announced their results, more than 70% have beaten analyst expectations. Aside from the bottom line numbers, we always scan the outlook statements from management for signs of future planning, and we’re encouraged by talk of renewed capital expenditure and increased merger and acquisition activity. Concerted signs of both will continue to provide support for equity markets in general. Recruitment remains sluggish but this isn’t a surprise. In the US, the bargaining power of the workforce is currently weak and it’s the corporates that hold the cards. This is supportive for both equity prices and for the continuation of the low interest rate environment for longer. These are not inflationary conditions.
Finally, one of the last remaining tail risks from 2012, a hard economic landing for China, is fading fast thanks to better than expected news from the region this week. Fourth quarter GDP figures beat expectations whilst retail sales and industrial production numbers were also buoyant. With a new leadership in place, the view on China’s prospects for 2013 is now turning bullish.
So, investor risk appetite is on the increase, and with good reason. There is plenty of positive commentary to be found and even the perma-bears are thawing a little. For some investors, particularly the contrarians, this might be a worrying sign, but the reality is that things really do look as if they are improving. We’re all benefitting from the brief respite from worrying over the deliberations of the world’s politicians.
Those investors still hovering on the sidelines are waiting for better opportunities to enter the market, whilst those in the market have little reason to sell. Better news continues to flow though, so markets should remain supported over the coming weeks. A pull-back in equity markets could throw up attractive investment opportunities, although clearly we’re not alone in that view and we suspect there are others on the sidelines waiting to put their cash to work. Equity markets are set to be supported for the time being, and any market dips are likely to be short-lived and shallow.
Image by Katrina.Tuliao [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons