Business | Markets
Gloom in equities show sign of lifting March equity rally fuels recovery speculation
Financial markets still split on whether stocks are simply enjoying a bear market rally or establishing a new bull trend.
- By Michael Mackenzie and David Oakley, Financial Times
- Published: 23:01 April 3, 2009
London: For global equities, March came in like a bear and went out a bull as many benchmarks enjoyed their first month of gains for the year and eased some of the pain associated with a bruising first quarter.
The turning point for equities came in early March, and financial stocks, which had been heavily sold, led the rebound.
The subsequent rally of more than 20 per cent for US stocks was kicked off when Citigroup told investors that it was profitable in January and February.
As other banks followed suit, financials rebounded from the depths and that lifted major global benchmarks up off the canvas.
The S&P 500, London's FTSE 100 and Japan's Nikkei 225 index posted their first positive month since small gains last Dec-ember, while the FTSE Eurofirst 300 and Dow Jones Industrial Average are in the black for the first month since last August.
Emerging market bourses sharply outperformed their rich-nation peers in the first quarter as tentative signs of growing risk appetite returned to the markets. The MSCI emerging market shares index is trading around the same levels as at the start of the year, sharply outperforming the S&P 500 and FTSE 100, which have both fallen more than 10 per cent since January 1.
The turn in equities is being lauded by some analysts as a sign that the global economy is poised to reveal the green shoots of a recovery that will be firmly established in the second half of the year.
"The market has begun to price in a second-half recovery and the overwhelming negative sentiment which peaked last month has subsided," said Stuart Schweitzer, global market strategist at JP Morgan Private Bank.
The rally in stocks, however, has not been accompanied by a significant improvement in corporate credit. This dislocation suggests to some analysts that stocks are simply enjoying a bear market rally, not establishing a new bull trend.
"The equity rally has been very quick and credit has not improved as much, which is a negative for stocks," said Anthony Conroy, head of trading at BNY ConvergEx.
Meanwhile, the S&P fin-ancials index has rallied more than 40 per cent from its lows. Short interest in stocks by early March was back at its highest level since last September, according to exchange data.
A trimming of those bearish positions had boosted stocks, traders said.
Another troubling aspect of the rally has been the lack of buying from retail investors, particularly when the market was reaching its highs for March.
Trim Tabs has reported that equity funds investing primarily in US stocks posted an outflow of $9.8 billion (Dh35.9 billion), versus a revised inflow of $131 million in the previous week. Exchange-traded funds (ETFs) that invest in US stocks posted an outflow of $5 billion, versus an inflow of $891 million in the previous week.
There also remain plenty of questions about the fate of financials. The US government's warning to General Motors that bankruptcy remains an option on the table, could well be followed by tough terms on banks, traders said.
Wariness over financials will continue until investors get a better sense of how successful the US Treasury's public-private investment plan (PPIP) has been and provided there are no nasty surprises from the ongoing stress tests being conducted for major banks.
The PPIP has many unresolved questions, namely the process of establishing a clearing price for loans between banks and investors.
Analysts say that banks are unwilling to sell loans at lower prices and thus incur losses that will require the raising of more capital.
For their part, investors are unlikely at present to step up and pay aggressively for loans and so cut their potential profits.
"It is still not clear how prices will be set and how many troubled assets are lifted off bank's balance sheets," said Michael Kastner, portfolio manager at SterlingStamos.
"Financials and the broad equity market will not go higher in a straight line," said Kastner. "We need a period of stability before the market trends higher."
Stability expectations may be challenged by a tough earnings season this month.
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