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Despite fears surrounding the recent downside volatility, underlying trends and economic fundamentals support a solid year for global equities, according to Fisher Wealth Management in its latest markets commentary.
Fisher believes the sharp downturn in global markets, beginning with the nine-day fall in the MSCI World Index in May, is a bull market correction, not the beginning of a bear market. Bull markets typically experience at least one correction (a 10 to 20% decline) every other year and volatility has been abnormally subdued during this bull-run - the recent drop in the MSCI World Index ends the third longest stretch without a correction in the Index's 36-ear history. Markets rarely stay dormant for long, so a sharp correction is not unexpected and perhaps overdue.
Andrew Teufel, Fisher's Director of Research said, "Recent market movement smacks of a classic correction - sudden, steep, and led down by the categories of stocks that led on the way up. Remember, bull markets have historically died on a whimper, not a bang. This looks and feels like a correction, not the beginning of a bear market.
"It is impossible to be sure how much more downside is to come but consistent with our portfolio management philosophy, we don't believe it is advisable to dance around short- term corrections, as they tend to end as quickly as they began."
The recent sell-off appears to have been sparked by investor fears that broad concern about rising inflation will force central banks to increase short-term interest rates more than previously expected, leading to an economic slowdown. Fisher believes the global economy has sufficient strength to withstand moderately higher short-term interest rates and believes that inflation is still well contained.
Even with the recent pullback, the solid beginning to the year bodes well for Fisher's bullish full-year global stock market outlook. Their research shows 15 first quarter returns greater than 4% for the MSCI World Index since its inception in 1969 - in 14 of those instances (93%), the index was positive in the back nine months of the year, and all 15 full years (100%) finished with double-digit positive results. The forces that drive strong first quarter global returns appear to endure even during years with high levels of volatility and Fisher identifies the following trends as likely catalysts for strong stock market performance in 2006:
- Long-term interest rates remain benign
Modest increases in long-term interest rates among major developed economies have been mostly confined to trading ranges seen in the last few years. Fisher expects this recent upward pressure on long rates will subside over the balance of the year as it did at the end of 2005.
- Continued economic and corporate earnings growth
Across the globe, economies and companies continue to exceed modest expectations. Fisher believes this trend will continue for the remainder of 2006.
- M&A wave and share buybacks continue to reduce global equity supply
As most companies in the MSCI World Index still have earnings yields (the inverse of P/Es) above after-tax borrowing costs for new corporate debt, there is a powerful incentive for them to borrow money for share buybacks and acquisitions. This effectively reduces the supply of equities.
Whilst M&As financed with over-valued shares can be bearish (as was the case during the dot.com era), the recent surge in M&A activity has largely been financed through cash - a bullish phenomenon.
Whilst Fisher believes the outlook for global equities in 2006 is bright, there are a handful of potential negative developments that would merit consideration. These include:
- Significant and sustained increase in long-term global interest rates
One of the most bullish features of the current market environment is the reduction of share supply through the surge in M&As and share buybacks. A significant and sustained rise in global long-term interest rates may reduce the incentive for companies to borrow money to finance these types of activities as well as potentially reduce the relative attractiveness of equities versus long-term debt.
- Flattening of the global yield curve
Despite flat yield curves in the US and UK, the GDP-weighted global yield curve spread remains nicely positive, indicating there is sufficient liquidity available to global borrowers to fuel continued economic expansion. However, should the global yield curve materially flatten or invert for a sustained period of time, global economic growth could be impeded.
- Populist Protectionism
If the recent surge in protectionist rhetoric leads to new legislation or trade barriers, equity prices may suffer. In Fisher's view, protectionism inhibits the efficiency of capital markets and the progress of globalisation.
To view the latest Fisher Markets Commentary in its entirety, please visit www.fi.com or www.fisherwm.co.uk.
For further information please contact:
Miles Standish
Managing Director
Fisher Wealth Management
020 7318 7183 |
Hugo Mortimer-Harvey/Sally Wright
quill communications
020 7758 2234
020 7758 2238 |
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