The MSCI World Index fell 3.2% in June, bringing the 2010 return to date to +5.9%. As has been the case for some months, daily volatility was high and media headlines often gave markets their short term direction.
During the first half of 2010 equity markets remained caught in a tug- of-war between strong economic fundamentals and investor fears around potential external shocks.
On the plus side, the US economy is over a year into its recovery and heading for a 2010 growth rate of more than 3%. Corporate earnings have been extremely strong, driven by increased revenues and lower costs following extensive cost cutting programs. Manufacturing and construction activity data trended upwards, while consumer and business confidence remained resilient. Inflation pressures were absent in the US and Europe where economic data was also positive in larger Eurozone countries.
On the other side of the equation, uncertainty lingered. The sovereign debt crisis in Europe was and is a real problem, escalating geopolitical tensions in Korea and the Middle East rattled nerves, Chinese policy tightening posed a possible disruption to global growth, and the oil spill in the Gulf of Mexico threw more uncertainty into the mix.
Further to this, investors focused on interest rate policies and the inevitable claw back of fiscal stimulus packages in place since Lehman Brothers’ bankruptcy 20 months ago.
Forecasts for ECB rate rises have been pushed out to the spring of 2011 as the debt issues in peripheral Eurozone countries remained real threats. US interest rate increases may happen sooner, though, as its economy is in better shape.
On the fiscal side, European governments have generally begun to tighten policy, believing that smaller government deficits will reassure consumers, ultimately helping the economy, while the US authorities are taking a different view, pushing fiscal tightening back until next year at the earliest.
Emerging market economies have powered ahead at a much faster pace than the developed world in 2010. Emerging markets were not constrained by the same excesses which the developed world has built up in the form of consumer and sovereign debt.
Source – KBC Asset Management