World equity markets look weak

USA

Despite initial strong rallies on the back of better than expected Chicago PMI and consumer sentiment index on Friday, U.S. markets failed to sustain the gains and closed the week with losses. Overall, the week was characterized by steady erosion of prices, especially in the technology sector.

Most companies have reported their 1Q results. The divergence between 1Q corporate profit (S&P 500 earnings -10.4%, y/y) and GDP growth (+1.2%, y/y) has led to doubts over whether listed corporate profits will benefit from an economic recovery to the same degree seen in previous recoveries.

However, on a quarter to quarter basis, according to First Call, corporate profits (+7.6%) actually recover in line with the economy (+6.6%). There are other encouraging signs. Of the 457 companies reported within the S&P 500, 61% has beaten expectations, up from 55% in 4Q01. The number of profit warnings in 1Q has decreased 9.4% from a quarter ago and 36% from a year ago.

For this week, the ISM manufacturing, to be released Monday, would be key to market direction. According to Bloomberg survey, market expects the data to improve to 54.5 in May from 53.9 in April.


Europe
Despite having been affected by Vodafone's results and the large drop in wireless equipment prices, European TMT stocks mostly rebounded off their week's lows on Friday. Looking ahead, our focus continues to stay with ex-TMT stocks.

The strong currency and relatively cheaper valuation (compared to the U.S.) should continue to support European markets.

The recent relatively strong performance of drug and bank stocks relative to their U.S. counterparts was seen as positive sign as investors appear to be looking for alternatives outside the U.S. markets.


Japan

The Nikkei consolidated last week after failing to break out from the strong resistance at 12,000. The strong JPY worked against the index as well.

Exporters suffered but domestic-demand issues continued to attract foreign interests. Foreign investors, which were net buyers of equities in the second and third week of May (+ 395 billion Yen), have been the main driving forces of the market in recent weeks.