Market Overview – February 2012

Stock markets world-wide have shown hefty gains since the beginning of the year notwithstanding continued negative news. This is while the World Bank and many other influential institutions not so long ago warned that Europe might show a Lehman-type of meltdown.  

There is, however, another side to the coin. Firstly there is the weak Euro which makes European exports and especially Germany very competitive. This should support growth in Europe and therefore one can agree with Christine Lagarde of the IMF that in all likelihood there is not going to be a recession in Europe. Secondly, employment is slowly rising in the USA. This brings more certainty that people will not lose their jobs and that current low interest rates can be made use of. Higher consumer spending can thus be expected, while manufacturing is also gaining momentum.  

Thirdly, it is expected that inflation will have dropped significantly over the last six months in China, which will pave the way for lower Chinese interest rates. This should boost economic growth, as well as new demand for commodities.  The copper price has already increased by 21% since October last year (admittedly from a low base). Fourthly, there is the reconstruction of Japan after last year’s earthquake and tsunami. It is expected that economic growth can ultimately amount to 2%.

The result of all these small pieces of positive news is that it does put growth on the table and pave the way for company profit growth. Market valuations in absolute and real terms are already attractive. This, together with further profit growth provides room for good stock market performance this year.