April may be the cruellest month, according to T.S Eliot, but it is also now starting to seem the month when investor sentiment is at its most optimistic.
This time last year, markets were slowly starting to make some headway from the nadir reached in March on the back of government stimulus.
Twelve months later, and another positive April has helped to drive equity markets on both sides of the Atlantic to their highest levels for almost two years.
A strong corporate earnings’ season and increased merger and acquisition activity, coupled with a steady dripfeed of positive macroeconomic data, such as the Federal Reserve’s “lower for longer” message on monetary policy, is starting to push the threat of a double-dip recession further away. There have even been signs of the much needed recovery in consumer spending, with March’s net retail sales figures recording the biggest monthly rise since November.
It would be naive, however, to ignore the fact that behind this period of market exuberance there are still significant headwinds to market recovery – notably the impending removal of monetary stimulus, Western sovereign debt levels, monetary tightening in Asia to combat asset price appreciation and sluggish Western labour markets. These hurdles have all been flagged but it is usually the bus that you do not see that runs you over.
China continues to surprise and intrigue, especially given the intense speculation surrounding whether the Chinese government will do away with the yuan’s peg to the dollar, a stimulus measure that has been in place since 2008. The Chinese government’s recent announcement that its economy grew by almost 12 per cent during the first quarter of 2010 certainly seems to suggest it is now confident enough with the strength of its own recovery and that the time is right to loosen its currency policy.
We are positive on the outlook for equities, supported by improving business and consumer confidence surveys, upwards revisions to global gross domestic product, the emergence of margin improvements at companies, and rising M&A activity. Nonetheless, we remain aware of the downside risks. Last year was very much a year of two halves and as we progress through this year we expect markets to be more skittish, but by the end of the year we still expect to see markets higher than they are today.
Bill McQuaker is head of multi-manager at Henderson