Market View - December 2009

"All that glitters is not gold" was definitely true in November as global equity markets continued climbing to new 52 week highs!

The S&P 500 in the US climbed almost 7% to close at 1107, only slightly down on its twelve month high of 1114 achieved on the 16th of the month and this despite the sizeable fall in global equity markets on the 25th of the month immediately following the "Dubai Debt Debacle" announcement. In the UK the FTSE 100 climbed 4.6% to close at 5277, 2.2% lower than its twelve month high of 5397 on the 16th November (source, Financial Times)

Jim Rogers, the investment guru whose Quantum macro hedge fund gained 4200% while the S&P advanced just 47% over ten years in the seventies, was making headlines again in November insisting that he "is not buying the equity rally", and reiterating his long held view that the commodity bull market has simply been in corrective phase this past year, and is set to resume its upward run for several more years. He includes gold (and gold mining stocks) in this commodity assessment sighting lack of supply and increasing demand due to the actions of the central banks following the credit crunch.

Certainly the recent surge in the price of gold appears to confirm Jim's view, with the metal rising almost 12% during November, and closing at $1,181 an ounce. However the Economist in an article titled "Paper promises, golden hordes" was less inclined to get carried away either by the recent price surge or by the purchase by the Reserve Bank of India of two hundred tonnes of the yellow metal, reminding us that the latter action only brought the representation of gold within India's reserves to 6%, and cautioning that a headlong retreat form the US Dollar would only accentuate the problem that such diversification was trying to alleviate.

The Economist article after considering the pros and cons of a new gold standard, and dismissing it in light of the evidence that it did not work during the 1930's depression, warns that gold's surge may be a warning that the next stage of the credit crunch fall out could be in the foreign exchange markets. Elsewhere some market commentators have previously expressed concern about the ability of some of the emerging economies and China in particular to be able to sustain the dynamic pace of growth they have enjoyed in the past decade, which is now perceived as being vital to leading the world economy out of recession.

Encouragingly The Economist's Economic focus article titled "Secret sauce" provides reassuring evidence on this front, confirming that "China's rapid growth is due not just to heavy investment, but also to the world's fastest productivity gains". Using a total factor productivity (TFP) growth formula, which seeks to identify the efficiency with which both labour and capital are utilized, the Economist article explains how research undertaken by Andrew Cates, an economist at UBS estimates that China's TFP since 1990 has averaged a staggering 4% per annum compared to the US, Japan, UK, Germany and France which an OECD study confirmed had averaged just over 1% per annum over the same time frame.

The study suggested that in addition to China, only India and Singapore managed to exceed 2% per annum TFP growth, while Thailand, South Korea and Indonesia were the only other emerging countries to exceed 1% PA. While the Shanghai stock market is now up more than 84% since its credit crunch low on October 27th 2008, talk of another bubble would at this stage appear premature and the potential for further attractive returns look good as they do also in India and other emerging markets.

Meanwhile the likelihood is that the easy money in Western markets has also happened following the rise in the S&P 500 of more than 64% to the end of November from the March lows when the index touched 667. With the market still almost 30% lower than its October 2007 high of 1565, there remains plenty of potential future returns provided the global recovery stays on track and corporate earnings continue to surprise on the upside, which should in turn increasingly attract more and more of the several trillion dollars worth of cash deposits still sitting on the sidelines and seeking better yields!