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The dominant themes of 2005 that fueled global equity markets look set to continue into 2006 according to Fisher Investments, the fee-based discretionary investment manager.
Fisher believes that the bull market still has some distance to run. Perceptible negative influences are likely already reflected in current market pricing and the euphoric sentiment which so often accompanies market peaks is noticeably absent.
Fisher has identified five factors it believes will lead to continued strong global equity market performance in 2006:
1. Equity valuations remain attractive
Equities are undervalued to a greater degree today than at any time since the bear market bottom in March 2003. Every major developed market shows a significant positive gap between equity earnings yields and respective government fixed interest yields.
2. Equity supply will continue to decline
Merger, acquisition and share repurchase activity surged in 2005 and is set to continue. Share issuance via IPOs and secondary share sales did not keep pace, resulting in the greatest degree of share shrinkage in memory. The basic rules of supply and demand suggest this will be bullish for equities.
3. Corporate earnings will continue to surprise on the upside
Globally, companies are enjoying impressive earnings growth rates. US firms are now expected to post 13% earnings growth for 2005, beating initial expectations of just 4%. Earnings expectations for non-US firms are also materially higher than they were at the beginning of the year, with an 8.7% rise in expectations for MSCI EAFE constituent firms since February 2005. Despite rising expectations, earnings for public companies worldwide should continue to outpace expectations.
4. The global yield curve is healthy
As financial institutions increasingly operate in global credit markets, they are no longer bound by borrowing and lending rates of their domicile alone. Although the US and UK yield curves are very flat, the global yield curve retains a healthy positive slope. This is an indication that the global economy is healthy and global equity markets should continue to do well.
5. Global interest rates should remain benign
Falling global long-term interest rates have provided stimulus to the world economy by slashing the cost of capital and lowering the hurdle against which equities compete. In the absence of significant inflation, rates should remain benign in 2006.
Andrew Teufel, Director of Research, Fisher Investments, said: �Last year we correctly anticipated a number of factors which we felt would be influential in 2005. The world economy and corporate earnings solidly beat expectations and global long-term interest rates remained benign. Merger and acquisition activity boomed and equities outperformed other asset classes.�
The endurance of long-term equity trends is regularly underestimated, and with the absence of any obvious catalysts for major trend changes in 2006, we expect last year�s bullish themes to persist.�
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