Market View - September 2009

It was a wise man who said "All I want to know is where I am going to die so I'll never go there". Similarly all we investors want to know is when the next equity bear market is due, so we can avoid it!

If only the markets were that predictable! August saw the current bull market in stocks carry on upwards, with both the S&P 500 in the US and the FTSE 100 in the UK posting new highs for 2009. The S&P 500 has now risen more than 50% since its March low, although it remains more than 30% lower than it stood at the beginning of the bear market almost two years ago in September 2007 (source

Stock markets have historically proven for the most part they anticipate developments in the economy six to nine moths in advance so does the current rally we have been enjoying signify that the recession (which commentators once feared could become a depression) is over? There has certainly been a lot of encouraging economic news recently to support this view including mortgage approval levels here in the UK at their highest for 17 months, while in the US the residential market where the sub prime debacle originated, the widely watched S&P Case Shiller housing index which tracks the prices of homes in 20 major American cities showed in May its first positive return for almost 3 years (source, The Economist).

**John Authers however in a recent FT "Long View" article was less bullish when trying to compare the current equity market rally with similar rallies in magnitude following the bear markets of 1929, 1932, 1974 and 1982. Disappointingly his analysis found that only the rally which began in August '82 continued its upward run, while the November '29 vintage turned out to be a bear trap as the market then plunged much further and the July '32 and December '74 versions continued in range bound trading moving sideways for quite some time.

The prolonged bull market rally of 1982 was partly fuelled by the steady reduction of long term interest rates from a high starting point, a luxury not available in today's market, and while more encouragingly the cyclically adjusted PE ratio of the 2009 market back in March did get close to being as attractive as the levels back in 1932, 1974, or 1982, it has since ceased to look so tempting. The omens look no better when comparing the likely fortune of markets post the bursting of a big bubble and here the FT superimposed a graph of the current market from the peak of the S&P 500 in 2007 with graphs of the US stock market between 1929 and 1944 (Dow Jones Industrial Average), gold between 1980 and 1996 (as measured by the London Comex Index), and the Japanese equity market as measured by the Nikkei between 1990 and 2006, with the conclusion suggesting that range bound sideways movement may be the best we can expect?

On a more upbeat note, a recent cover story from **"The Economist" titled "Asia's astonishing rebound" is much more encouraging, and suggests that region's emerging economies probably grew at an average annualised rate of over 10% in the second quarter, while America's GDP fell by 1%. For 2009 as a whole, recent forecasts suggest that emerging Asia could grow by at least 5%, while the G7 economies contract by 3.5%, and the article goes on to explain that across the emerging Asian economies, the biggest fiscal stimulus of any region globally has helped revive domestic demand, and while China's package grabbed the headlines, South Korea, Singapore, Malaysia, Taiwan and Thailand all had a government boost of at least 4% of GDP this year.

Inevitably however concerns have been voiced of possible asset bubbles forming again in both equity and property markets throughout the region but **although share prices on the Shanghai Composite in China for example had at the start August more than doubled since November last year, (a healthy correction has since occurred with stocks coming off by almost 20%) they were still almost 50% below their 2007 peak. The article goes on to explain a number of measures the authorities might deploy to arrest these growing asset bubbles including allowing their currencies to appreciate and tightening credit but suggests that for the moment China will probably simply continue to try and tighten lending standards.

The Economist article concludes that the "gap between growth rates in emerging Asia and the G7 is forecast to rise to a record nine percentage points this year" and pours water on those sceptics whom believe that the phenomenal GDP growth in recent years of the Asian tigers is unsustainable and says "If anything the crisis has reinforced the shift of economic power from the West to the East". John Authers in his most recent "FT Long View" article appears to agree and concludes "It is as well to remember this lesson; Best returns come to contrarians, with the best opportunities probably coming in emerging markets".