Wobbles Or Woes?
It‘s just a month since global stock markets wobbled. Happily we are now in a position to describe it as that: a wobble. Global markets have recovered since 27 February with the FTSE-100 Index up 0.5%, the FTSE All World (ex UK) up 0.2% and the S&P 500 up 1.4% (Source: Financial Express, 27/02/07 to 29/03/07 total return). Although modest, taken against the rather dramatic falls at the end of February, the markets have rebounded reasonably well.
What remains to be seen is whether the wobble is an early tremor, preceding a wider and more prolonged period of global stock market woe. Those who believe it is point to the potential for a serious downturn in the U.S. economy. Broadly speaking, the argument goes that the ‘fear‘ of the recent bad news concerning the U.S. housing market (particularly the sub-prime mortgage sector), helps to create a more serious down turn. As businesses and consumers become more cautious about the prospects (and in some cases fearful) for the U.S. economy, so they decrease the amount they‘re spending and thus slowing the economy. This is important because it is the U.S. consumer that has effectively spent the economy out of trouble in recent years.
On the other side of the coin there are those that see the recent falls as a natural market correction and a gentle reminder to some that risk exists. Here the argument is more multi-faceted. There are those who believe that despite the problems being experienced by the U.S. housing market, the rest of the U.S. economy is strong enough to ride out any such slowdown. And here it is true that corporate earnings growth has remained strong. There is also a view that the U.S. stock market is still reasonable value. For example, the price to earnings ratio (P/E ratio) is still relatively low compared to long term bond yields, suggesting that the income from equities is cheaper than that of bonds (the P/E ratio is the price paid for a share relative to the income or profit earned by the firm per share).
Furthermore, whilst acknowledging the importance to the global economy that the U.S. plays, some argue that it is no longer as important as it once was. The fact that emerging markets now play such a significant and increasing role in the global economy has been given as a reason why a U.S. downturn may not be as calamitous. This view asserts that the global economy can remain buoyant even if the U.S. struggles. In 2006, for example, the B.R.I.C. economies (Brazil, Russia, India and China) accounted for over 40% of the world‘s population and over 10% of global GDP (Gross Domestic Product). However, before one gets carried away, it is worth remembering that the U.S. economy still accounts for 28% of global GDP.
Either way, most analysts agree that most of the major stock markets will struggle to deliver double digit returns in 2007. Nonetheless, most also agree that there remains significant reasons to participate in the markets. Strong stock picking and good asset allocation can still provide attractive returns.
[This section was compiled using data and information obtained from BBC Online, MFC Global Investment Management, Goldman Sachs and M&G Investments]