Global data indicates good growth with low inflation

I see the investment environment remains very positive for equities and that global economic data continues to paint a picture of good growth with little inflation. The pointers to that effect, as seen from last week's developments, were as follows:

I remain confident that the flow of global economic news will be sufficiently strong to keep the equity markets gently appreciating, whilst sufficiently weak to keep policy makers eager to maintain their support. Globally economic growth continues to meet best expectations. With few signs of inflation central banks will keep interest rates low. With bond markets still very well behaved I expect equities to make further progress.

The US economic data was full of contrasts last week. The near term econ-omic recovery seems assured with better than expected consumer confidence data, however, the longer term worrying picture is one of consumers reducing debts and saving more. The Michigan US consumer confidence index was ahead of expectations at 70.2 compared with the cyclical low of 55.3 last November. Whilst consumers are more confident it doesn't mean they will spend money. US consumer credit fell a record $21.6 billion (Dh79.3 billion) in July, the sixth straight month of declines. The short term picture will remain in focus this week with economists expecting strong retail sales and a further lift in industrial confidence. However, the strong retail sales will principally reflect purchases of automobiles as buyers have responded to government incentives to trade in their old cars for new models.

Despite recent worries, the Chinese economy continues to provide some spice to the global economic recovery. Data last week showed that whilst the recovery is slowing somewhat, it is still vibrant. In August, year on year, Chinese retail sales increased by 15.4 per cent, industrial production was up 12.3 per cent and fixed investment was up 33.5 per cent. I urge short-term caution on the equity market.

The Dubai markets received further welcome support from the authorities last week when His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, was reported as saying he is "not worried" about the emirate's ability to repay at least $4.5 billion of debt this year. Taking these comments with the actions of the Central Bank the previous week, the Dubai financial markets should take heart that much is being done to renew confidence in the local economy and markets. I have felt recently that some investors and international commentators had taken a far too negative view of local conditions. I believed that the persistence of oil prices at around current levels, combined with the now more V-shaped recovery of the global economy, were all factors that would eventually contribute to the UAE's recovery. I continue to advise investors to remain committed to the local equity market. Valuations are attractive and I expect the flow of better news to continue.

Gold broke through $1,000 last week. However I expect the price to consolidate around current levels rather than rise significantly higher. Although gold broke through the $1,000 level, the rise on the week at just over 1 per cent was quite modest in the context of the $100 rise since early July. The dollar's sharp fall and signs that central banks were net buyers of gold of late are all factors that explain why gold has risen and are not necessarily reasons why it should rise further. With speculative positions in the gold market at a peak, and technicals suggesting the price will struggle to make further significant gains, we are tempted to take profits.

The dollar's further demise came as something of a surprise, particularly against sterling. What strikes me is the under appreciation of the seriousness of the headwinds to the UK economy over the coming years. Whilst investors can argue convincingly that the US consumer will need to retrench with private credit at over 300 per cent of GDP, what do you think UK consumers will need to do with a ratio of 460 per cent?

- The columnist is chief investment officer, Emirates NBD, Private Banking, Dubai. Opinions expressed here are his own and do not reflect the views of Gulf News.