Since the beginning of the fourth quarter, most equity markets have given back some of the gains made over the spring and summer. Signs that inflation may be getting a grip in Europe and the US is the apparent explanation for this turn in market sentiment. It could also be the case that after several months of rising share prices, a significant minority of investors decided to realise some of their profits.
The net result is that most equity indices have fallen by between 2 per cent and 5 per cent so far in October. Both the S&P500 and the FTSE Eurofirst300 indices are down by approximately 3 per cent, whilst the UK's FTSE100 has declined by 5 per cent in October. The Iseq Overall index has not been immune and is down by about 4 per cent since the end of the third quarter. This still leaves healthy year to date returns in Europe of approximately 12 per cent. In contrast, the US S&P500 index and the Nasdaq Composite are now in negative territory in the year to date.
If the current bout of weakness turns out to be a short-term correction, then a reasonably good outturn in November and December would result in good 2005 returns for equity markets outside the US. It is, however, instructive to put 2005 in the context of performance over recent years. Most equity indices hit their bear market low points during the first quarter of 2003.
The FTSE100 index hit a low point of 3492 on March 7th, 2003, and by end of September of this year, it had risen 57 per cent to 5478.
In the US, the S&P500 bottomed a little earlier at 801 on October 4th, 2002 and since then, it has risen by 54 per cent. The recovery in share prices has been more pronounced in Europe and Japan. The DJ Stoxx600 index has bounced by 73 per cent to the end of the third quarter and the Nikkei 225 is up 76 per cent from its market low of ,7679. In Europe, Germany's Dax stands out and by the end of September it had bounced 110 per cent above its bear market low point of 2,403. The Iseq Overall index has participated in this global rally and by the end of September it had bounced 81 per cent above its low point of 3,790 reached in February, 2003.
The Irish market stands out from the crowd in one significant aspect, as it is one of the few markets to have regained its previous bull market peak. At current levels, the Iseq index is at or near to is bull market peak of 6,839. All of the major stock markets are trading well below their respective bull market peaks. In Europe, France's CAC40 and the Dax remain 30 per cent below their respective peaks. The S&P 500 is trading 14 per cent below its peak whilst the FTSE100 is 15 per cent off its peak. In Japan, after almost 15 years of deflation and very weak economic growth, the Nikkei index is still a staggering 65 per cent below the peak that it reached way back in 1989.
The fact that global equity markets have still not regained their bull market heights may be seen by some investors as a positive feature on the view that share prices will eventually regain such levels. Unfortunately, there is no prescriptive reason as to why this should occur. Investors need only look at Japan to see what happens if the bursting of an asset price bubble is followed by a long period of deflation.
Fortunately, the chances of the 1990s Japanese experience being repeated in America and Europe is extremely remote. The good news of the past two years is that corporate earnings have grown very rapidly and thus the rise in share prices is soundly based.
Although markets have been rerated, price earnings ratios in many markets are close to long-term historical averages. With corporate balance sheets also in good shape, Investor takes the view that economic and financial fundamentals are sound to support an ongoing upward trend in share prices.
The fact that European and US indices have not yet regained their bull market peaks, coupled with positive price earnings ratios and good corporate health, suggests good buying openings to those investors who wish to commit some more cash to company shares.
