Reversal of fortunes for markets
04 February 2010
The markets experienced a reversal of fortune in 2009, rebounding after the catastrophe of 2008, according to Schroders’ latest report,
Such turnarounds do not happen often, just six times since 1871. The latest was set up by a bout of extreme pessimism in March, the point at which bonds and equities had discounted depression.
Schroders argue that valuations still leave scope for the rally to continue into 2010. Such a move would be helped along by the combination of low interest rates and rising profits.
Another key theme is economic divergence: the gap between the developed and emerging markets which should mean that capital continues to flow into the latter in search of higher growth.
The report said that, later in the year, markets can be expected to focus on the impact of tighter liquidity as central banks gradually exit from the very loose monetary policies deployed to head off the crisis. Although policy makers will move gradually, bond yields are likely to come under pressure and we would be looking to rotate out of credit and high yield into equities.
The report said back in March this year, markets had discounted another Great Depression. Bond markets were priced for ten years or more of deflation and the long run implied rate of dividend growth in equity markets was approaching zero, an unusual occurrence since 1991.
It added: “Though the recession has ended, the cost of government intervention is still being counted, with bond vigilantes waiting on the sidelines. The European Commission has continued to call for credible plans to bring public deficits back under control, though leaders continue to argue that it is still too soon to remove fiscal support.
“Very poor public finances are slowly being recognised in Europe, with markets beginning to pay close attention to the poorest performers. Spain and Portugal have had their ‘outlook ratings’ downgraded by Standard & Poor’s from ‘stable’ to ‘negative’, while Greece had all the major agencies queuing to downgrade its sovereign debt.”