Equity markets around the world have rallied from the lows of 2009 offering 60% gains for bottom feeders brave enough to take stock. The FTSE World Wide index now stands within 25% of the 2008 peak. In developing markets, the gains had been even higher, rallying from a low of 160 to around 340 according to the FTSE index, with the market now ready to test the 2007 high of 360. Markets had been supported by a strong growth in corporate earnings and a period of low interest rates.
Challenges to equity markets will be high levels of growth in the developing world, generating higher inflation. In turn this will require central bank action to push interest rates higher. Commodity prices, especially food prices are being pushed higher by world demand, with demand price effects exacerbated by supply shocks from natural disasters. China as the second largest economy in the world has pushed world trade beyond the tipping point. Demand for commodities is enhancing the incomes of commodity endowed developing countries, food spend is increasing in line with GDP growth changing the supply - demand balance in the short term.
Within Europe, fears over central bank default are easing despite the increasing spreads on gilt rates for the PIGS. Portugal, Ireland, Greece and Spain. Gilt yields on Greek bonds had risen to 13%. An olive branch of the Euro no longer appears to be on the horizon.
Our forecast for the FTSE end of 2011 is 6,500, that’s an eight per cent rise from current levels. Markets are set to test the 6,500 high before the end of the year but any push beyond in the Autumn will return to find support by year end.
In the UK we expect above forecast growth, with inflation remaining a challenge to policy in 2011. As for base rates, the market consensus is for rates to end the year at 1.25%.
If GDP growth is as high as we anticipate in the first quarter of the year, the shocking inflation figures could force the Bank of England to act earlier. Rates could begin the rise as early as April or May pushing beyond 200 basis points by year end.
Sign up today and "subscribe" for e-mail notification of updates. Thanks to Mike Lenhoff, Chief Strategist, Brewin Dolphin for the pro.manchester presentation on the 3rd March inspiring this post.
The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.
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Posted by: Cheap Pandora | March 09, 2012 at 08:03 AM