Major Equity Markets 2010: Fisher Capital Management Part 1

Sentiment in the equity markets has been steady over the past month.
Markets in Europe have been unable to resist downward pressure. The
Japanese market is also lower; but there has been resistance amongst
the emerging markets in South East Asia that are supported by more
favourable economic conditions.

The Chinese authorities are obviously determined to prevent their

economy from overheating. The global recovery will therefore only
proceed at a very slow pace, and there may well be setbacks along the
way, although a move into a “double-dip” recession still seems unlikely.
There is also an increased danger of a sovereign debt default by Greece,
and possibly even by Ireland. But the swing in sentiment should not go
too far. So long as monetary policy remains supportive, the global
economic recovery is likely to continue, and this will eventually produce
a sustainable improvement in equity prices. Patience will therefore be
the most important requirement amongst investors until some of the
uncertainties have been resolved.

The Fed is in a very difficult position. The statement after its latest OMC
meeting was cautious about economic prospects, conceding that “the
pace of recovery in output and in employment has slowed in recent
months” and was likely to be “more modest” than anticipated in the
near-term. But monetary policy was left basically unchanged at the
meeting, perhaps because of the “unusual uncertainty” about prospects,
and this caused some disappointment. However there is little doubt
that further monetary easing will be introduced if the position continues
to deteriorate, because the bank’s main priority is to try to maintain
some momentum in the economy. And fiscal policy is also likely to
remain supportive, despite the massive size of the existing deficit.
Congress has been reluctant to authorise additional spending
programmes; but there is intense political pressure ahead of the elections
in November, and further programmes seem likely.

The critical question for investors therefore is whether the continued

monetary and fiscal support will be enough. They have been prepared
to adopt a bullish attitude to the situation, and this mood has been
helped by an encouraging flow of corporate earnings results that have
often exceeded expectations, and confirmed that the corporate sector
has been coping well so far with a difficult situation.

The gloom should not be overdone. So long as monetary policy remains

supportive, we believe that the odds favour the continuation of the
slow recovery, and that this will eventually produce better market
conditions.

Mainland European markets have fallen back sharply over the past
month, after the strong rally. There has been evidence of a further
improvement in the economic background in the euro-zone, and second
quarter corporate results have generally been encouraging; but the
signs of weakness in the US economy and the slowdown in China has
raised doubts about whether the German export performance that has
been providing most of the momentum for the recovery can be
maintained; and there have also been renewed concerns about the
possibility of debt defaults amongst the weaker member countries of
the zone. The markets have therefore been unable to resist downward
pressure.

The euro-zone economy improved much faster than expected in the

second quarter of the year. Growth is estimated to have been around
the 1% level, the fastest quarterly level for three years; and this has
eased the fears about a move into a “double-dip” recession, at least for
the moment. But it is a two-speed recovery, with the German economy
estimated to have grown by 2.2% during the quarter, the Netherlands
economy by 0.9%, and the French economy by 0.6%, but with Spain
and Portugal basically unchanged and the Greek economy falling further
into recession. With domestic demand weak, it is therefore essential
that overseas demand remains buoyant if German exports are going
to continue to drive the overall economy forward; but this is now very
uncertain, and so growth projections for the rest of this year and for
2011 are still fairly cautious.

However the European Central Bank is maintaining its optimistic view

of prospects. Speaking before the latest figures were announced, the
chairman, Jean Claude Trichet, argued that the second quarter outturn
would be better than expected, that there would also be an encouraging
result in the third quarter, and that there was no prospect of a move
into a “double-dip” recession.

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