Uncertainty has been the watchword for equity investors in 2010. Markets have been positively bipolar, as good corporate earnings and a gradual economic recovery have struggled to banish a succession of spectres, from Chinese tightening to European sovereign debt, a possible Chinese slowdown, more European sovereign debt, the US mid-term elections, currency wars, fresh Chinese tightening and European debt again. Ben Bernanke did not help in July when he dubbed the outlook “unusually uncertain”.
Recently, however, the market has been less spasmodic. We have had relatively smooth progress over the autumn, with the MSCI World index up by more than 17 per cent from its lows of early July.
So what next? After such a strong run, a short-term pullback is certainly possible as we approach the end of the year but there are plenty of reasons for equity investors to take heart.
First, for all the agonising in the press over Ireland, Portugal and the future of the euro, the market seems to be treating the eurozone as the boy who cried wolf. At the time of writing, MSCI Europe is down by less than 1 per cent for November in euro terms (although it has fallen further in dollar terms as the euro has weakened). Following recurrent bouts of fretting over Greece earlier in the year, reactions to the sovereign debt issue have become sanguine.
Perhaps this is overly optimistic but it is encouraging that investors appear to be focusing more on the prospects of the companies listed in Europe than the fortunes of the continent’s peripheral economies.
In general, macroeconomics has taken a back seat to company fundamentals worldwide. Japan has been the notable exception, given the strength of the yen – although the Japanese market did perform remarkably well in November.
Second, corporate earnings have been healthy. The third-quarter reporting season was generally strong around the world and built on good results’ seasons earlier in the year. The steady progress that companies have been making all year provides a useful corrective to the turbulence in the markets.
Third, US economic data has continued to improve and the American consumer is in remarkably good shape. Most significantly, November’s data has shown that jobless claims – stubbornly high for most of the year – are starting to fall.
The residential property market remains weak, however, not helped by the misapplication of the foreclosure process. The widely predicted results of the mid-term elections remove at least once source of uncertainty but it remains to be seen if president Obama will alter his policies to appease a wrathful electorate. The imminent expiry of the Bush-era tax cuts is the most pressing issue here.
Fourth, monetary policy is still highly supportive. The US Federal Reserve’s second ound of quantitative easing was widely anticipated but investors can take comfort in the fact that US authorities have demonstrated they will do what it takes to prevent a return to recession.
Fifth, the world’s emerging markets remain the real engine of global growth. The challenges here are very different from those faced by the developed nations.
Inflation is the main threat in India and China but the authorities there are alert to the risks and interest rates and banks’ reserve-requirement ratios have been rising and, of course, the growth in emerging markets benefits not only companies listed there but also many companies listed in developed markets.
Finally, global stockmarkets still offer compelling value. With every likelihood that interest rates will be lower for longer in the developed world and bond yields still near record lows, equities continue to offer the most attractive balance of risk and return.
After a highly uncertain year, that should provide stockmarket investors with at least some degree of certainty.
Tom Walker is manager of the Martin Currie portfolio investment trust