The growing confidence among investors that central bank policies and the euro zone rescue efforts have laid a path for global recovery, and higher prices for riskier assets, still faces many tests, fund managers and strategists say.
One potential road block is seen, as inflation risks from higher oil prices with the US and Japanese central banks due to meet in the coming week, while in Europe the German ZEW survey will be tracked for signs growth there is on track.
Risk assets ended the past week firmer after Greece reached a deal with its private creditors, which effectively ended the prospect of the world’s largest ever sovereign debt default.
Along the way MSCI’s global equity index posted its biggest one-day fall of the year, then recovered to end the week showing gains of nearly 10 percent for the year to date. Similarly, strong gains have been recorded for German and Japanese equities this year, and for copper, gold and oil.
“The dip encouraged me, but you can’t wait for dips in this market,” said Trevor Greetham, portfolio manager at Fidelity Worldwide Investment. With the risk of a Greek debt default off the table for the foreseeable future, HSBC’s Global Head of Macro and Investment Strategy Philip Poole is another moderate bull, even after the gains seen in many asset prices so far this year.
“I think its impossible to sustain the pace we’ve had since the start of the year...but in reality we look at the valuations and we don’t think, even with what has happened, those valuations are really over stretched.”
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Fidelity’s Greetham believes that, although the euro zone political risks remain high, the scale of central bank policy easing since late December and signs of a US-led recovery in global growth, justifies a shift in asset allocation to stocks and commodities.
He prefers US stocks but is also overweight UK equities, a wide range of commodities and global property securities.
Greetham said the US equities look good in part because fiscal policy remains firmly stuck in expansion mode due to the presidential election, while Europe embarks on austerity measures, driving a pronounced divergence in performance between the two regions. The latest Thomson Reuters Directors Report on US corporate earnings adds weight to this view finding that S&P 500 companies are look set to post a rise of 8.2 per cent in earnings for 2012 after 10 per cent growth last year.