GOOD TIMES FOR EQUITIES MAY NOT LAST

 
David Morris
CFD MARKET STRATEGIST, GFT
DESPITE a couple of nasty dips earlier this year, 2010 is ending on a high note for equity investors. Worries over the European debt crisis, concerns about stubbornly high US unemployment and a crippled housing market, and growing fears of inflation in emerging markets have failed to inflict serious damage to the upward trend. As we head into the home straight, the bulls continue to trample on the bears, and most investment houses are calling for further gains in 2011.

But just how good has 2010 been for equities? In a crude overview of the past twelve months, the US came out top. The Nasdaq is up 18 per cent, while the Dow and S&P have both risen around 10 per cent. The tech-heavy Nasdaq outperformed as corporations preferred to invest in IT upgrades rather than take on new staff. The German Dax 30 also did well, rising 16 per cent thanks to its strong manufacturing base and high productivity. The UK’s FTSE 100 tacked on a respectable 7 per cent, benefiting from the heavy weighting of multinationals within the index – and it would have done better were it not for BP’s disastrous performance. But other European indices fared less well. The French CAC 40 looks likely to end the year down. The Italian MIB has fallen 14 per cent and Spain’s Ibex is off 18 per cent. Investors remain concerned about the unresolved debt issues in the euro zone.

Surprisingly, given how bullish many brokers have been on the region, the major Asian-Pacific indices failed to shine this year. The Hang Seng is flat; the Japanese Nikkei is down 3 per cent while China’s Shanghai Composite has fallen 11 per cent. For China and other developing economies, the US Fed’s stimulus has added fuel to their overheating markets. A pick-up in inflation has led to fears that the Chinese authorities will soon tighten rates sharply. With GDP in developed economies still pointing to a pathetically weak recovery, investors may be relying too much on China. If so, then investors in the US, UK and Europe’s core could be overestimating the upside for equities in 2011.