Fate

I argue that the fate of the global equity markets is very much in the hands of bond investors. Under normal circumstances, this is the best time to be in equities but these times are not normal, so do not expect that the outstanding performance of 2009 to be repeated this year.

If international bond markets calm down again – and that may happen at least temporarily – equities can probably post further but modest gains in 2010, however, the end game is approaching. If bond investors do not revolt in 2010, they probably will in 2011, so playing the economic recovery through equities is a dangerous game.

The big challenge will be to get the timing right. These situations can run for longer than most people can imagine. Japan’s crisis has been widely predicted for almost a decade now and now the ship appears to be as steady as ever. The Dubai crisis taught us that markets are in a forgiving mode at the moment and before long, Greece could very well find some respite from its current problem. But then again, governments will find just like millions of households have found over the years that you cannot spend more than you earn in perpetuity. The enormous debt levels being created at the moment will haunt us for many years to come and we may have to wait a long time to see the PIIGS fly again.

In 2009, there have been massive flows of capital towards emerging markets and towards Asia in particular and valuations have been driven up as a result. It is hard to argue that these markets yet in bubble territory. Asian countries have effectively adopted a monetary policy which is entirely unsuitable for economies growing as fast as they do. That is how bubbles have been created in the past and why Asian equity markets should be monitored closely for signs of overheating in the months to come.

The world’s stock markets have produced brilliant returns over the past nine months. This has provoked some of the best and brightest in our industry to declare that there is a dis-connect between the economic reality and the picture painted by Wall Street.