A Global Beat: Global Equities Are Back

Global equities gained 1% last week in local currency terms, reversing their small losses of the previous couple of weeks, and are back hovering around their late April highs.

By Rupert Thompson, Chief Investment Officer at Kingswood

global equity, investment, US equities, UK equities, equity market, stock market
A Global Beat: Global Equities Are Back

The Recovery Has Been Seen But Not Yet Met Expectation

The news over the last few weeks has been very supportive for equity markets. The corporate earnings season for the first quarter is now drawing to a close and earnings everywhere have beaten expectations substantially. The beat has been most striking in the US, where earnings now look set to be up 50% on a year ago, double the gain expected at the start of reporting.

Meanwhile, the economic data is starting to show the strong economic rebound now underway led by the US. Global business confidence hit a 14-year high in April, with both manufacturing and services bouncing back. Whereas the first quarter saw a sizeable gain in US GDP but renewed declines in UK and Europe, the second quarter should see strength all round.

However, there was one surprisingly weak data release last week. US employment had been expected to post a huge 960k gain in April but instead rose a comparatively paltry 266k. The unemployment rate also unexpectedly edged higher to 6.1%. This softness is at odds with the strength shown in almost all other releases and probably not too much should be made of it.

Market Growth Outlook Remains Very Positive

Still, there is a silver lining for markets here. We are now at the point in the US where the danger is becoming one of too much growth, rather than too little. Fears had been rising that the economy will overheat, forcing the Fed to bring forward the start of the tapering of its QE program and the eventual first rate rise. These worries have now been eased somewhat by the employment numbers.

With the recent economic and earnings news so good, why then have markets made little progress just recently? The answer seems to be quite simple – a lot of good news was already in the price. Markets are always forward looking and it is often better to travel than arrive.

We are also, as pointed out a couple of weeks ago, now in what has typically been a less favourable time of the year for equities. For whatever reason, markets typically fare best between October and May. A pause or correction is also overdue. The last 5% dip was back in late October whereas 5% pullbacks in the past have on average occurred three times a year.

That said, any correction is likely to be limited in scope with the macro backdrop remaining very positive. A considerable amount of cash is also still on the sidelines, some of which may end up in equities. We continue to believe markets have further upside over the coming year.

Prospects of UK Equity Market

Here in the UK, the Bank of England last week released an upbeat set of economic projections. It is now predicting growth of 7.25% this year, up from its previous 5% forecast. This is the largest gain in 70 years, albeit following the largest decline in 300 years.

Inflation, meanwhile, is forecast to overshoot the Bank’s 2% target over coming months but return to target next year. As expected, the Bank made no significant policy change, with the pace of bond purchases trimmed but the overall size of the QE program unchanged at £895bn.

UK markets have perked up a little recently. The pound has broken above $1.40 this morning for the first time since February and UK equities outperformed last week. Sterling’s move higher, however, has been more a result of dollar weakness than any glee at the prospect of a Scottish independence referendum, possibly as early as next year.

As for UK equities, they have so far reversed only a small part of their previous underperformance. They have room to outperform further on the back of their cheapness and what should after all be the fastest growth in 70 years.