INVESTOR: The improvement in the American economy is expected to lead to a lagged improvement in the European economy.
From early December, the corporate financial reporting calendar tends to become very quiet. The vast bulk of companies will by now have reported their latest financial results to the marketplace and it will be January before results covering the fourth quarter of the year begin to be announced.
A high proportion of recent earnings results pleased investors as companies did as well as, or slightly better than, analysts' forecasts. Of course, expectations had been lowered quite drastically so that the profit hurdle to be jumped by companies had already been lowered.
Nevertheless, the general conclusion was that the worst has been seen in terms of declining profits and that profitability has now resumed an upward trend, albeit from a lower base.
While new company data are now thin on the ground, there are plenty of important economic data releases.
Added to this busy calendar of economic data are the changes in government budgetary policies as well as interest rate changes from central banks.
The net impact of economic and financial news over recent months has been to create a sea change with respect to the consensus economic outlook.
In particular, there has been a startling turnaround in the United States towards a more upbeat assessment of near-term economic activity. Various indicators of confidence for both US consumers and manufacturers have turned upwards. In tandem with these indicators, it seems that the American consumer is continuing to spend and therefore fears that America will suffer a double-dip recession are rapidly receding.
Early indications are that the important Thanksgiving holiday period went well for retailers. For example, Wal Mart reported a single-day sales record on the Friday after Thanksgiving with a 14 per cent rise on the same day from the previous year. US economic data releases through Christmas and the New Year will be scrutinised to see if they confirm this positive shift in economic views. Iraq is a wild card but, for the moment, there seems to be widespread relief that the US is acting in the context of United Nations resolutions.
On this side of the Atlantic, the economic news from the euro zone has not been quite so upbeat. Rates of economic growth are faltering in the bigger economies, particularly Germany. The Stability and Growth Pact is under pressure and it seems certain that some changes will be made to the rules governing the size of government borrowing limits. Despite ongoing concerns about Europe's structurally high unemployment rate, any sustained improvement in the US economy could be expected to lead to a lagged improvement in the European economy.
As the table shows, equity markets built on the recovery in October posted healthy gains in November in response to this recent improvement in the economic and financial climate. Of the major indices, the biggest bounce came from the Nasdaq index that rose by 8.7 per cent. The more broadly based Standard & Poor's 500 rose 3.9 per cent while, in Europe, the FTSE Eurotop 300 and FTSE 100 rose by 5.8 per cent and 4.3 per cent respectively. At home the ISEQ lagged somewhat with a rise of just 2.6 per cent.
Despite the gains over the past two months, global equity markets have on average still lost about one fifth of value so far in 2002. In contrast, bond markets have risen and have produced a positive return of 6.5 per cent over the year to date as measured by the JP Morgan Government Bond Index.
In the context of the relentless erosion in share prices over recent years, it is clear that the recent rise in equity values merely recoups a small portion of such losses.
However, this mini-recovery seems to have calmed the fears of many investors who are now prepared to at least countenance the view that the bear market may have finally bottomed.
Low interest rates and bond yields are a key plank of the bull case for equity markets looking into 2003. With the returns from low-risk deposits so low, the dividend yield alone from many shares now looks very attractive. For example, the dividend yield on most bank and insurance stocks is significantly higher than the rates of interest offered by those institutions on their respective deposit and savings products.
Another factor is that the negative impact from the various accounting scandals in the US seems to have run its course. There are now real hopes that a more stringent regulatory environment will lead to improvements in accountancy practices amongst large corporations in particular.
If America avoids a double-dip recession and the euro zone achieves even modest economic growth, the scene could be set for a positive 2003 for global equity markets.
