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By Chris Tedder, Research Analyst, Forex.com
Equities have been bolstered by positive earnings, especially out of the US, which is providing markets with a false sense of security in our opinion, at least when it comes to equity markets in the UK and the Eurozone. Preliminary figures out the UK indicate that the domestic economy is in a technical recession, and Spain also slipped into recession in the first quarter of 2012. Whilst the recession in Spain is not surprising, a double dip recession in the UK poses some downside risk for stocks on the FTSE or may at least cap any potential gains for the index.
Yet, stocks in the UK didn't react significantly to the preliminary GDP data as investors retain hope the official figures will be revised upwards, which stems from the disconnect between the preliminary figures and the closely-watched CIPS activity surveys which are more bullish. Historically, however, if GDP is revised upwards it is only on average by around 0.1%, which is almost insignificant. Thus, given the minimal movement as a result of the preliminary figures we think there is more downside risk from the official figure.
In the US, stocks are being bolstered by hopes of QE3, improving growth forecasts and strong earnings. Whilst we agree that the somewhat improving growth prospects for the world's largest economy is a positive for stocks markets, the growth rate is not going to be stunning, but we think it will be sufficient to keep the Fed from turning on the printing press. Also, once the 'earnings effect' starts to wear off equities may suffer. Overall, two out of the three reasons for a rally in equities are in question, but improving growth forecasts are a significant reason to rally, the question then becomes is it enough of a reason without the other two.
The future of equity markets in Asia are the brightest, even with the softening of Chinese growth figures. Improving private and public sector manufacturing PMI figures, along with the expected policy easing from Beijing suggest that Chinese growth may turnaround from here. Hence, we expect growth to pick up in Q2 and annualised GDP growth this year to be around 8.5%.
Nonetheless, one of our favourite equity markets is in Indonesia. The domestic economy is growing at a very robust 6.49% y/y and whilst the unemployment rate remains a little high (currently around 6.56%) it has come down dramatically from the 10%+ levels last seen in 2006.
However, what does this all mean for stock market in the Middle East? Equity markets in the Middle East are still broadly linked to overall risk sentiment, thus the drivers of sentiment discussed earlier have the ability to affect stock prices in the Middle East, especially Dubai.
But markets in the Middle East have other reasons to rally, namely the high oil price which has been the backbone of some strong performing equity markets in the region. Equity markets in Saudi Arabia and UAE (with Dubai gaining more because of a reinvigorated property market and its safe haven status than the rise in oil prices) are up by an average of almost 20%, compared with -0.43% ytd for the Euro Stoxx. If the price of oil starts to slide, however, some stock markets that are closely tied to oil may start to suffer and move more in line with risk sentiment.
Staff
