Stock market confidence is on the up and this year (with a hiccup at the end of May/June) has already been a good year for markets, particularly in the developed West: the FTSE 100 is up 15% and, as I type, has just crept through 6,600; the S&P 500 is up 20% at 1,685; even the Eurostoxx 50 is pushing on the door of a double-digit year-to-date rise.
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Institutional investor confidence is up
Research among institutional investors by State Street Global Markets shows, in its July figures, an increase in risk appetite from Asian investors that nudged its global confidence index up 0.8 points from June to 107.6 (100 is neutral, neither increasing or decreasing their allocation to equities).
Confidence in taking risk is up with it.
Meanwhile in Europe, an improvement in investors’ approach to risk pushed their own confidence index up to 105.7 from 98.2. US investors remain the most positive although their confidence index dropped slightly, from 114 to 113.7.
Yet despite being the most positive group US investors are, perhaps perversely, most concerned about the direction their stock market is going in.
Harvard University professor Kenneth Froot (who helped develop the State Street Confidence Index) voiced their concern over the rapid run-ups in stocks and markets, saying: “Investors are back to a more realistic concern that, distortion or not, higher nominal and real rates translate into less credit extension, less leverage, and slower growth. This has been underscored by the results of the earnings season, which have been mixed.
“It’s also a reminder that the previously high rates of forecasted earnings growth are, at this point, in the unlikely positive tail.”
This would suggest that the rise so far in the S&P 500 is not destined to continue at the same pace, assuming Froot’s comments about earnings growth are correct.
UK consumer confidence is up
UK consumers are more confident than they have been for three years though, putting this in context, the consumer confidence index in question (produced by GfK) is still recording negative numbers.
What makes this better news than its negative numbers might suggest is that it comes as the UK economy grew by 0.6% in Q2, twice the pace of growth of Q1 – talk of a dip, let alone a double or even triple dip can be parked for now. Particularly since services, manufacturing and construction activity is all rising at the same time, according to the latest PMI data.
The latest economic sentiment survey from the European Union also shows that Malta and Croatia are the only countries stopping the UK economy being the most upbeat of any European country in July.
Finally, in one of those fluffy, touchy-feely surveys (surprisingly put together by the number crunching Office for National Statistics) personal well-being in the UK has improved since last year and given 2012 included the Queen’s Diamond Jubilee and a staggeringly successful London Olympic Games (not forgetting the scarcely believable Ryder Cup win) that is quite an achievement!
The upshot of all this positive news, particularly for the UK, needs to be put in context. The best word to use to describe it is “encouraging”. It is certainly not going to mean wholesale changes to asset allocations or investment strategies and we are still not going to see a flood of new investor money hit the market by the end of the year.
But I would urge investors to see this armed with a glass half full, justifiably for the first time since 2007/08. The fact that sales into equities are on the up – into UK equities in particular – would suggest that investors are now not just talking about increasing exposure to a traditionally riskier asset class but actually doing so.
As ever, there are caveats here too with Nigel Cuming, chief investment officer at Cannacord Genuity Wealth Management, saying: “Given the extent of the rally one could conclude that developed equity markets are getting close to a major top. In the US, the Dow Jones Industrial Average is up nearly 140% since the March 2009 low and approaching 25% since last November.”
Thankfully, Cuming is quick to refill his glass and add: “But there is nothing to suggest that it is imminent. Similarly, although there are genuine grounds for being very cautious of medium term bond prospects, there seems no compelling reason to fear a bond market rout in the short term given that interest rate rises are still several years away.”
So, even with the shroud of political (the Zimbabwe election was yesterday, Germany’s is in September, Egypt’s is imminent), social (Egypt again, much of the Middle East, China if GDP growth falls to 4% or 5%) and economic (pretty much everywhere) problems that are still very present indeed, there is now more reason for UK investors to be cheerful than not to be.
