Most investors are happy and the FTSE World Index is up almost 80% from the 2002 lows, with many eme...
Most investors are happy and the FTSE World Index is up almost 80% from the 2002 lows, with many emerging markets recording even stronger gains. Indeed, for global investors, the key decision over this period has been to keep away from Wall Street and a weak US dollar.
Surprisingly, the rally has so far focused consistently on the same sectors and each year the market pattern has been similar. The past three years have seen a sell off early in the year – usually impacting cyclicals and resources – but full recovery in the summer. It has been wrong to sell on the setbacks. Indeed, 2006 was particularly painful for those who turned defensive in May.
It is precisely the background of nervousness – keeping some cash on the sidelines – that has kept excesses in check and maintained a sound base for the market. In most major markets, valuations are not excessive – share price rises reflect genuine progress in company profitability. Company balance sheets are also strong and dividend growth has come in ahead of expectations.
Each year of growth in the economies of China and India makes them less dependent on the US consumer. Despite attempts to cool China's economy, leading indicators are positive, pointing to a pick up in growth this year. For many commodities, supply is struggling to keep up with booming demand. It still looks right to be overweight in resources, although the value now is in precious metals rather than oil and gas.
Many emerging markets are linked to commodity prices. Continuing scarcity of resources should support these markets.
Although the US housing market is slowing, this should accelerate interest rate cuts stimulating other sectors. Europe has more scope to recover and improve productivity and there are signs of a pick up in the German economy.
Major markets now move together – a challenge for investors looking for diversification internationally. For example, the property sector boom has largely been a global phenomenon. Property may no longer provide the diversification from shares and bonds that it once did.
There are risks to the global economy: cheap money has added leverage to enhance some areas of low return.
Some lower quality new issues have targeted hot themes, jumping onto the bandwagon too late. However, provided a longer term approach is taken, there are still opportunities in resources, property and infrastructure in many areas.