Indications point to further upside for the markets

The debate continues between those investors who see the near-term upside from markets and those who fear the longer-term problems will ultimately drag the markets lower. I see further good upside for markets. I continue to advise investors to remain fully committed to equity markets where valuations are comfortable given the very low level of global interest rates.

So far, most of the cash that has gone into financial markets has gone into bond markets. As investors catch up with the good global economic news we expect to see more interest in equity markets. Latest US mutual fund flow data shows that there has been a net redemption of $300 billion (Dh1.1 trillion) of money from US cash funds since the end of March. Nearly $270 billion of that cash has gone into bond funds and only $30 billion into equity funds. As investors start to allocate more emphatically to equities we could see a significant rise in equity market indices.

US economic data was much stronger than expected last week, adding weight to the near-term view that global financial markets will make further good progress. The US Empire State index of industrial confidence rose to 18.9 in September, much better than expected. The US Philly Fed index surged to 14.1 in September after climbing almost 12 points to 4.2 in August. The index was at 3.8 a year ago. US retail sales surged 2.7 per cent in August, well ahead of expectations. US industrial production rose 0.8 per cent month-on-month in August from an upwardly revised 1.0 per cent gain in July.

I believe the better economic news will help drive the global equity markets to new 12-month highs over the balance of the year. In the Mena region the potential upside is even greater due to the poor relative performance of markets over the last 12 months. The re-establishment of an oil price above $70 can only add further support to local sentiment.

Sterling was under pressure last week and we expect that pressure to continue with a near-term target of $1.50. The negative view on the outlook for the UK is a mixture of poor short-term factors and significant structural problems. The UK currency remains under considerable pressure, most notably against the euro (back above 0.90), but its failure to capitalise on the recent dollar weakness is also noticeable. This is a theme I have warned about frequently in recent weeks, and last week's data went to the heart of some of sterling's problems with M4 money supply remaining weak (+0.1 per cent m/m in August despite considerable quantitative easing by the Bank of England in recent months) on top of net public sector borrowing of £16.1 billion (Dh95.6 billion) in August, a bit better than expected but still £6.2 billion higher than the same time a year earlier. Cumulative borrowing over the 2009-10 fiscal year, stands at £65.3 billion, compared to a £26.1 billion in 2008-09. The implication of all of this is that monetary policy - and perhaps fiscal policy as well - may need to remain accommodative for much longer. I expect sterling to remain vulnerable on the crosses and it may even falter further against the dollar if its losses start to run out of steam as we expect they might.

Latest data for money flows had both good and bad news for the dollar. US Treasury capital flows data showed foreigners dumped another $97.5 billion in US assets in July, after selling a revised $56.8 billion in June (was -$31.2 billion).

However, contrary to the rumours, China was the biggest purchaser, grabbing $24.1 billion, after selling $25.1 billion in June. Further support for the dollar came from the trade data that showed the US current account deficit narrowed to $98.8 billion in the second quarter, from -$104.5 billion in in the first quarter (revised from -$101.5 billion).

Bonds remain very well behaved and corporate bond spreads continue to narrow. Retail and institutional investors have remained buyers in recent months, easily soaking up any new supply.

The columnist is chief investment officer, private banking, Emirates NBD.