Asian equities may have more bounce

For those investors looking for trends to follow now is as confusing a time as any. The long hoped for stabilization of world markets is proving as elusive a quest as world peace.

In Japan the Nikkei 225 index closed above 9,600 last week compared to its low in late April of 7,600. A nice return if you were perceptive enough to invest in this sluggish market in April. But a pretty poor one if you went in when it was first at this level in the early 1980s! And even with this gain, it should not be forgotten that over three, six and 12 months the Tokyo market is the worst performer among the world's leading stock markets.

On the bond front, Japanese government bond yields have risen sharply; probably on the hope that the authorities are about to implement effective measures against the country's persistent deflation. The coming presidential election in the ruling Liberal Democratic Party due in September is possibly having an effect here.

The winner will also inherit the dubious privilege of taking on Japan's economic problems. It is thought that whoever wins will do so by compromising with the anti-reform forces within the LDP, which may be negative for Japanese shares. Notwithstanding the recent yield increases, Japanese bond yields still remain substantially below those available in America or Europe.

Elsewhere in Asia markets are trading at or close to highs for the year thanks to the global market recovery and the over-reaction to the SARS virus coming under control, as well of course as the virus itself. A rise in dollar terms of almost 21% for the quarter to 17th June in the MSCI AC Far East Free Ex-Japan index is roughly on a par with the MSCI World index over the same period.

The nation which performed most strongly was South Korea with an increase of 33%. Singapore and Taiwan have produced returns in line with the regional average, leaving Hong Kong as the relatively poor relation with 12%.

A recent survey by Merrill Lynch on global fund managers suggests that the rally could have further to run in Asia than in other regions; 72% of managers based in the region said its markets were undervalued. This is a far greater number than any of the world's other main investment regions. Asian fund managers were also upbeat about the corporate outlook. A net 72% of managers said they expected profits to improve in the next 12 months.

One item of news which did contribute to the general optimism was news that China is signing a trade agreement with Hong Kong which helped the region's stock markets.

In the UK the strong performance in the FTSE100 during in April and March leveled off last month, with June's performance almost flat. For the year to date markets have performed in line with how I would expect a recovering market to act with Small Cap funds winning, with an increase of 9.6%, over Medium Cap, at 8.7% and the blue chip sector returning 4.9%

But the continuing volatility of the UK stock market is reflected in the longer term averages, according to Morningstar as measured by their category averages. Over the past three months the UK Equity Large Cap category is up 15.1% but over a year it is down 16.8%.

The Merrill Lynch fund manager survey, mentioned above, found that 79% of UK managers said their own market is overvalued or fairly valued. This was higher than any other main investment region. This seems to reflect the view that valuation levels in the market are reasonable, but gives little indication which way markets will travel over the coming months.

Unexpectedly the Natural Resources Sector Equity category has had a volatile time so far this year, and as usual these funds will be a risky bet for private investors.

The category average performance of -10.4% during last years bear market was fairly good compared to the market as a whole, but this year has shown an average return of only half of the rise in the Global Equity category (8.6% so far in 2003)

However, the average return hides a marked discrepancy between the underlying sectors. The best performing funds in this category last year which I recommended in an early article last year - those focusing on gold and mining companies - have mainly been poor bets this year.

Gold funds traditionally tend to be regarded as a safe haven, and can do well when the wider market is suffering from problems. For example, they benefited from investor anxiety as the Iraq war was unfolding, but have suffered with the relative decline in the dollar and relaxation in post war tension.

Stocks in the Nasdaq hit a near a 14-month high last week at 1,721.25. This was the highest close since May 17, 2002 as bullish comments from Wall Street's biggest brokerages on the chip sector and an anticipated economic recovery fuelled the buying of technology shares. An upbeat view on technology spending from Goldman Sachs, and a report from Deutsche Securities revising upward its outlook for the global chip market helped to spur the market.

In the US, the Dow Jones industrial average ended the week up 146.58 points, or 1.62 per cent, at 9,216.79, after rising more than two per cent earlier in the session. The broader Standard & Poor's 500 Index rose 18.8 points, or 1.91 per cent, to 1,004.50.

It would appear that investors are betting on a rebound in the second half of the year, fed by low interest rates and solid corporate earnings in the quarterly earnings season, which starts this week. Whether earnings will justify the markets' rally has yet to be seen.

So with ups and downs, and volatility still the order of the day, it looks like there are profits to be made if you get the timing right, but for those looking for a trend to follow, there does not seem to be much of a clear path. And for those of a cautious nature, safety, security and patience would seem the watchwords.