Momentum is with risk assets at present. The implementation of QE2 back in November appeared to quieten down the bears and draw a line under the likelihood of a double dip recession. That said, the world has not changed greatly since the beginning of 2010 - the same threats of sovereign debt weakness, poor credit conditions, heavily indebted consumers and high unemployment are still very much present.
What has changed is market sentiment, which has taken a decided shift towards the positive, on the back of the 2010 experience. Despite the continued resurfacing of those issues outlined above, global economies have proven fairly resilient. As equities have continued to rally into the New Year it seems that the arguments brought forward from the pessimists are looking increasingly less valid, whereas the evidence weighing up on the side of the optimists looks far more convincing.
One of the key stories to emerge post-Christmas has been the strength of global manufacturing, with estimates consistent with a 4.5-5% growth in worldwide GDP for the year ahead. According to the latest Purchasing Managers Index (PMI) data, the US manufacturing sector grew in December for the 17th consecutive month, rising to 57 in December from 56.6 in the previous month, due to faster growth in new orders and production. In the Eurozone, the PMI rose to 57.1 in December, up from 55.3 in November and ahead of expectations. And finally in the UK, PMI reached 58.3, its highest level since 1994. The rise was attributed mostly to a stronger manufacturing sector, which benefitted from strengthening demand from overseas markets as the weaker pound boosted price competitiveness. However, weaker data released on Thursday from service sector companies, blamed on December’s weather, managed to rub some of the shine off the overall picture. Clearly the two-speed nature of the UK economy persists, although the services sector slowdown (much of which is seasonal, and with other factors such as the VAT rise to contend with) had been clearly flagged for several weeks.
The downside of such positive sentiment, of course, is that it can quickly become built into equity valuations. Already there is a growing wariness amongst the Octopus Multi Manager team that, with so much support for equities, the short-term outlook already appears somewhat over-optimistic. One could make an argument that stockmarkets in the very short term look a little overbought and in danger of an imminent…
