Established stocks take back mantle

 
Julian Harris
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STOCKS in developed markets have rallied in the opening weeks of this year, driven by more optimistic forecasts from the US and Europe.

Despite a knock to equities from the recent uprisings in the Middle East, developed country markets are attracting investors more than emerging markets, for the first time since 2007.

The MSCI World Index of equities, designed to measure the equity market performance of 24 developed markets, began the year on 1277.20, but shot up 6.6 per cent to 1362.62 by the end of last week.

The Libyan crisis has seen the measure of stocks slip to 1358.10, but analysts remain optimistic.

“Developed markets, led by Wall Street, have outperformed emerging markets, which have been going nowhere for a few months,” Brewin Dolphin chief strategist Mike Lenhoff told City A.M.

The boost has been driven by upwardly revised economist forecasts in the West. In America the recovery is being boosted by a “unique” environment of loose monetary and fiscal policy, Lenhoff said.

“US is operating in its own orbit,” he added. “In Europe there’s at least fiscal austerity. Yet Germany too, the anchor of the Eurozone, is going very strong, and the French outlook has been upwardly revised.”

In emerging markets, stocks fell 2.7 per cent between the start of 2011 and the end of last week (from 1153.55 to 1122.01, as measured by the MSCI Emerging Markets index).

The slowdown reflects greater monetary tightening in the world’s upcoming countries, where economies were starting to overheat, Lenhoff said.

“In China both rates and the reserve requirement have increased,” he said, “while rates are going up everywhere – India, Korea, Latin America, and in emerging European countries like Poland and Hungary.”

The rise in commodity prices is more likely to affect people in developing countries, Lenhoff explained: “If more of a family’s budget goes to keeping body and soul together, food prices bear greater importance.” This has made rate hikes more urgent in those areas, Lenhoff said.