Over the festive break one would have expected a good deal of 'sober' reflection on the remarkable upturn in investment markets since March 2009. I was half expecting a modest correction at the start of the New Year. But what is becoming evident is that the markets are pricing in an even stronger global recovery than most analysts would have predicted just a few months before the year end.
Last month we reported on the sharp upturn in corporate bonds which has benefitted many clients. The UK commercial property market has also turned the corner and in December the IPD Monthly Index produced the biggest monthly gain in its 23-year history. Clients who bought extra property fund units to take advantage of the depressed values are now reaping the rewards. The turnaround has been marked but what should investors expect from now on?
We have now passed the first anniversary of the low point of the bear market, with the MSCI World index rising 61.7% since then. The global recovery continues to unfold. In the Eurozone, industrial production rose 1.7% in February - the largest ever monthly gain, while in the US retail sales surprised on the upside, rising 0.9% in February following a solid January increase. Following a period of increased volatility across the globe the 'VIX' volatility index recently fell to a 22-month low of 17.3.
The FTSE All-World equity index rose 1.1 per cent, to a fresh 18-month peak earlier in the month. However, there are concerns that distortions in the global economy and the heavy indebtedness of many developed nations could still upset the worldwide recovery. Prior to the global financial crisis concerns about imbalances in the world economy were on the increase. This was typified by America's large current account deficit and China's massive surplus.
For the first time since the collapse of Lehman Brothers markets across the globe trembled in fear early in the month as the worries of a risk contagion spread through credit markets. The cause was Greece’s massive debt crisis, and outright panic was avoided only after the European Union and International Monetary Fund announced an eye popping €750bn loan package to stem the loss of confidence.
Economic uncertainty has increased over recent weeks as a result of the growing euro crisis. On the other hand global corporate default rates recorded a sharp month-on-month fall in May, reflecting the generally improving economic outlook and better credit conditions in the wider sphere. Industrial production in the eurozone grew for an 11th consecutive month in April, although with ever widening divergences between the main and peripheral states.
In recent weeks there has been increasing talk of the possibility of “double-dips” in major global economies. Such scaremongering obviously impacts market sentiment and of course threatens to become a ‘self fulfilling’ prophecy, but real evidence to support such concerns is hard to find. Most fund managers are still predicting continuing gradual improvement - albeit at a much slower pace that we have seen over the last 12 months.