|Market outlook still uncertain|
|News - Latest|
|Wednesday, 22 August 2012 15:55|
Andrew Morris, managing director of Signature, believes markets are improving amid continued uncertainty in the eurozone
“The start of the football season and markets are continuing to make progress.
“On the surface everything is feeling pretty rosy. Even the VIX or ‘fear index’ last week touched a five year low as investors appeared to be very relaxed about taking on risk.
“Unfortunately, an analysis of second quarter results from the corporate sector highlights a worrying divergence between the fortunes of corporate US and Europe. Of those that have reported, the pattern amongst a number of European companies has been the failure to match market expectations.
“In comparison, US companies have once again managed to surpass them, albeit less comfortably than in previous quarters. In addition, European analysts are continuing to reduce their earnings expectations as the malaise in Spain and Italy clouds visibility and drains confidence.
“This then poses the question as to why stock markets have been so resilient over the summer months, in the face of what remains a challenging and apparently deteriorating outlook.
“First of all, it should be remembered that equity markets are generally forward indicators, and that analysts’ forecasts have a tendency to lag so it may be that analysts are simply catching up with what the markets had already priced in.
“The other thing to bear in mind is that volumes in many markets have been extremely low, even taking into account that this tends to be a quiet time of the year anyway. This may potentially mean that markets have been driven up on very low volume, and thus when volumes ratchet up to more normal levels in September, conviction may be tested.
“With the main European leaders beginning to return from their holidays, attention once again looks set to return to the eurozone issues, with Greece in particular back to the fore.
“Meanwhile in the US with elections pending, the as yet unresolved fiscal position is likely to be increasingly in the spotlight.
“In January the combination of the expiry of the Bush tax cuts coupled with the automatic fiscal tightening have the potential to wipe an alarming 4% off the country’s GDP. In all likelihood a compromise will again likely to be found, but one suspects that, as with last summer’s debt ceiling negotiations, there will be a high stakes game between the two parties which may mean a resolution only at the last minute.
“So whilst the performance of stock markets over the summer has been very pleasing, it is important that investors do not score an own goal, by getting carried away and become overly exuberant in the face of a market that we believe has not been tested, due to low volumes.
“Outlook comments from the corporate sector should be noted and continue to highlight the high degree of uncertainty that currently exists.”
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