After global indices hit 12-month highs in August, the debate continues as to whether the rally is s...
After global indices hit 12-month highs in August, the debate continues as to whether the rally is sustainable, with many favouring Japan as the leader going forward.
From March to 22 August, the FTSE All-Share rose 27.13%, the S&P 500 22.8%, the Bloomberg European 500 index 30.75% and the Nikkei 27.83%, all in sterling terms.
Jim Wood-Smith, chief analyst at Gerrards, says: 'The view most commonly expressed is that the rise in share prices is no more than a summer phenomenon caused by fund managers taking holidays and leaving their juniors in charge of their funds. One broadsheet even went as far as to describe it as an office boy rally.'
Wood-Smith says this is misleading and the reality of the rally is that equities are still offering good value and are likely to continue their welcome progress.
He notes: 'What we see is the market taking a view on improving corporate earnings and some selectively encouraging economic data from America, both of which are contributing to a reluctant but growing confidence that 2004 will be a better year all round.'
Henderson Global Investors is also positive on equities as retail sales growth in the US continues to rise at impressive levels and the consumer keeps on showing strength.
Katie Pybus, strategy analyst at Hendersons, says: 'We continue to believe sustained good news on the economy and earnings will be needed to lift markets significantly higher from these levels.'
She feels equity markets can return 7% per year in the future.
Scottish Widows Investment Partnership (Swip) believes valuations are currently on the expensive side of fair value, although not significantly so. The group is favouring UK equities over those of the US, which is sees as expensive, while emerging markets offer comparatively good value for money.
Pybus also sees relative strength in the performance of emerging markets, noting it has been one of the best performing asset classes this year, up more than 30% in the year to August, and is expected to continue rising. While presently overweight Japan, the move is a tentative one for Swip until the rally looks more sustainable.
Hendersons is more positive on the region. As Pybus notes, Japan has surprised many this year by consistently beating growth expectations.
'We have been more bullish than the consensus on Japan for quite some time and continue to feel comfortable with this view,' she says. 'The Japanese economy has posted six consecutive quarters of GDP growth and survey data points to continued strength.'
Key to the region will be the participation of domestic investors in Japan's rally, she says, and at the moment they are still selling.
According to Swip's head of Japan research, Anne Marie Main, foreign investors have been aggressive buyers of the market and concerns remain on the domestic investor front.
However, she notes: 'For the time being, foreign buying is more than enough to offset selling by Japanese institutions and individuals.'
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