Global equities have risen 12% since lows in June, boosted by sharp declines in crude oil prices and bond yields, as well as a resurgence in mining stocks, and the rally could further broaden out, according to the Bank Credit Analyst (BCA).
The rally, which followed a sharp correction in global markets that set in on 10 May, reflects growing optimism that the US economy will enjoy a soft landing and that inflationary pressures will diminish, say authoritative analysts at BCA Research. In the year-to-date, the Morgan Stanley Capital International (MSCI) index for global equities has risen by 10% in dollar terms, and 9% in domestic currency terms.
Among developed markets, year-to-date gains in equity prices have ranged from as much as 27% (in dollar terms) in Portugal, to a decline of 8% in New Zealand, where trade deficit worries have scared investors.
Emerging markets as a whole have risen by 12% in the year-to-date, while the BRIC (Brazil, Russia, India, and China) bloc has surged by 27% in dollar terms, and by 24% in domestic currency terms.
Venezuela has rocketed 45% in dollar terms, and by more than 60% in domestic currency terms. The only losers (with returns below zero) among emerging markets in the year-to-date, leaving aside war-affected Israel and Jordan, are Turkey, Colombia and South Africa.
Global markets are being led by large capitalisation US stocks, which turned north in mid-July. US stocks are on average now trading at levels not seen since early 2001. BCA Research says that while the benchmark world stock index ”is still fractionally below its May high, market health is improving.
”Our breadth measure for 36 major country markets has rebounded sharply in recent weeks, indicating that there is increasing participation in the equity rally”. But while breadth is improving, the analysts warn that more growth-sensitive markets, industries and stocks are lagging as global economic growth moderates.
Some possible bright notes may arise in parts of the commodities complex, according to a recent report by Merrill Lynch. Analysts anticipate the global economic environment to be supportive of base metal markets in the near term, on the basis that concerns over the impact of a slowdown in global economic growth on base metal markets may have been overdone.
In this respect, a soft landing for the US economy in fact has to be good news for commodities and commodity stocks in general. Much of the recent nervousness afflicting metals prices and some mining stocks has been the fear that a downturn in the USA may have a knock-on effect elsewhere leading to a fall in metals demand. If US economic growth is only to falter slightly, then metals demand will remain high, and current, and continuing, production shortfalls will mean the high base metals price scenario will continue and mining stock earnings will continue at current enhanced levels or even higher.
Merrill Lynch argues that the momentum in the world economy continues to be boosted by encouraging employment growth, a robust global investment cycle and a favourable financial environment. Economic growth in China, the world’s biggest consumer of raw materials, is expected to be ”extremely metal intensive during 2007”.