The first half of 2000 has been something of an ordeal but despite some nerve-wracking gyrations in ...
The first half of 2000 has been something of an ordeal but despite some nerve-wracking gyrations in international markets, the MSCI World Index has shown remarkable resilience.
That said, the positive performance of global equities as a whole masks some fairly dismal results from a few individual markets, notably the UK. The FTSE All-Share is off 4.3% in sterling terms so far this year. This, and the recent sharp declines in the value of sterling has certainly helped to strengthen the argument in favour of international diversification.
Given recent talk of a hard landing in the US and the global recession which might ensue, the stoic reaction of the world market as a whole is especially pleasing. We have survived a sustained period of rising wages and falling unemployment along with a near tripling of the oil price, with no real evidence of the sort of inflation which need trouble the Federal Reserve unduly. It now seems that the worst inflationary dangers have passed.
Whether this will lead to another stage of the bull run is another question. One of the Federal Reserve's principal concerns in recent years has been the impact of the "wealth effect" of the surging US stock market. If the Dow and increasingly watched Nasdaq look like reaching new record levels, the Fed may well rein in the markets by further tightening monetary policy.
The UK is currently comparatively good value, with the P/E ratio of the FTSE 100 at around 17 times, compared to around 24 for the Eurozone.
If anything the prospects are brighter in Europe, though, as consumer confidence is strong and job creation is maintaining its recent momentum. Also, much of Europe still lags behind the UK in various inflation-dampening developments like utility de-regulation and technology advances.
The eurozone offers the further advantage of increasing corporate activity and potentially significant currency gains in the medium term.
Japan will certainly need a soft landing in the US if it is to achieve a sustained recovery.
The market has had a dismal few months, but the company reporting season was positive, while consumer spending rose unexpectedly in April.
Other Asian economies are likely to produce mixed signals as they attempt the transition from export-led recoveries to domestic consumption-driven growth. Markets generally look well supported, though, as valuations are attractive and recent economic data has been strong.
Progress in the emerging markets will rely heavily on the news from Wall Street. Political uncertainty has unsettled Mexico in recent weeks, but as long as the election runs smoothly and fairly, prices should be well supported by improving economic growth and inflation numbers.
Robert Burdett is assistant director at Rothschild Asset Management
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