Improving market sentiment has driven all the key global markets upwards in the last month, as expec...
Improving market sentiment has driven all the key global markets upwards in the last month, as expectations of a recovery begin to gather strength.
The UK performed broadly in line with the global economy during October's upswing, posting growth of 4.2% compared with a 4.8% rise in the US equity markets, according to Michael Karagianis, head of global strategy at Aberdeen Asset Management.
'All the markets are reacting to the same sort of news and expectations. First, the expectation that we are nearing the end of the economic downturn and, second, the decline in risk as a result of breakthroughs in the Afghan war.'
The effects of the multi-faceted policy response that has seen interest rates trimmed across all the markets, Japan aside, are now filtering down into the market, he says. Moreover, the apparent success of the US-led Western coalition's military actions in Afghanistan is boosting confidence that the upheaval will be over sooner than anticipated.
While the outlook remains opaque, the falling interest rate environment, coupled with deflation and weakening oil prices, are all conducive to improved corporate profitability.
Karagianis says: 'People are buying from the bottom and pushing the market up. We are seeing a lot of capitulation ' those that are still cautious on the market feel they cannot afford to be not buying into the market.'
While equity valuations are naturally more attractive, by and large, given the FTSE's contraction over the past 18 months, Karagianis stresses that investors are buying into improving expectations, rather than improved fundamentals.
Karagianis says: 'People are buying expectations. If you look at the economic data, there is a lot of bad news out there, but the markets always turn one or two quarters before the economic data improves.'
If the anticipated improvements in the economic outlook do not materialise in the next few months, another sell off is a distinct possibility, he adds.
Aberdeen's house view is that the UK is set to outperform Europe in the near to medium term on the back of interest rate cuts and strong consumer spending. The UK and the US markets have both fallen by about 23% over the past 18 months and much of continental Europe has fallen by some 35%, adds Karagianis.
'Much of Europe is down a fair bit and the UK will probably outperform Europe in the near term.'
John Snell, fund manager at Aegon Asset Management, remains bullish about the UK consumer but acknowledges that the pending Christmas season will provide the acid test for the retail sector and consumption as a whole.
'The UK consumer has been very strong and a mainstay of a lot of the growth that has taken place, which we have seen in the performance of some shares,' he says.
Commenting on Japan, Snell says that, while valuations have fallen away, particularly over the past 18 months, the unclear macro outlook deters him from investing heavily in the beleaguered Far Eastern behemoth.
UK consumer spending is strong.
Interest rate cuts are having an effect.
UK likely to outperform Europe in short term.
Market volatility remains.
Lack of visibility ongoing.
Japan likely to underperform.
Two global vehicles
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