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There are still plenty of reasons to be sceptical about the recovery

ALTHOUGH news of a €110bn bailout package for Greece failed to calm the market’s jitters, investors are generally increasingly confident. Standard Chartered’s Risk Appetite Index is edging higher in risk neutral territory while volatility has dropped – the Vix is back below 20 while the European VStoxx is down 22 per cent over the past year.

And they are confident with good reason, perhaps. While there are still concerns about a sovereign debt crisis and potential bubbles in China, Standard Chartered analysts reckon that in the short term, these concerns are likely to be outweighed by positives such as a healthy first quarter US earnings season and strong data out of the US, Germany and Asia.

According to data released last Friday, the US economy grew at an annualised 3.2 per cent in the first quarter, supported by strong personal consumption. Survey data out yesterday also showed healthy expansion in the US and Eurozone manufacturing sectors.

But while these may be good reasons to feel confident, there are indications that investors ought to temper their bullish attitude. Indeed, star fund manager William Littlewood, who manages Artemis’s Strategic Assets fund, has recently increased his cash holding to 25 per cent from 15 per cent as protection against an equity market reversal.

Yesterday, David Rosenberg at asset management firm Gluskin Sheff pointed to the ongoing positive tone in US Treasuries, a fresh 2010 high for gold futures and oil breaking back above $86 a barrel as reasons for concern. Rosenberg, who is well known for his deep-rooted pessimism, gave 10 reasons for a dose of caution when it comes to investing in the markets.

First, markets were unimpressed with the size of the €110bn rescue package and the ability of Greece to meet the terms. According to Rosenberg, a bailout of the Club Med countries could near $800bn.

Second, Beijing raised its reserve ratio requirements by 50 basis points to 17 per cent for the third time this year. If China continues to slam on the brakes, then this will undermine the near-term commodity price outlook. Third, Australia has just announced that it will slap a 40 per cent tax on mining profits. The tax, which is scheduled to come into effect in 2012, is opposed by the world’s mining giants which have said they will scale back their operations in the country.

Fourth, the SEC’s investigation into Goldman Sachs is cause for concern. Goldman’s share price has since lost 21.3 per cent and analysts are re-rating other financial stocks in the anticipation of harsher regulation.

Fifth, the leading US economic index published by the Economic Cycle Research Institute (Ecri) slipped to a 38-week low. “With the restocking phase complete and fiscal stimulus waning, prospects of a second half slowdown loom large,” warns Rosenberg. Sixth, the Case-Shiller house price index fell 0.9 per cent in February, suggesting we are in a renewed leg down in US home prices. Financials, retailers and homebuilders are not priced for this and their shares may suffer if it keeps falling.

DOWNSIDE SURPRISES
Seven, initial jobless claims are still around 450,000. According to Rosenberg, this is not consistent with sustained employment growth, notwithstanding what non-farm payrolls tell us this Friday. A new peak in the unemployment rate and a new trough in home prices stand as the most pronounced downside surprises for the second half of the year.

Eight, Treasury yields have collapsed by nearly 35 basis points from their recent highs and in Rosenberg’s opinion are not consistent with the recent move by equities to price in peak earnings in 2011. Junk bonds are also trading back to par for the first time in three years.

Nine, the attempted terrorist attack in Times Square over the weekend is a clear reminder that geopolitical risks have not gone away. Such events can move the markets substantially and investors should be aware of the implications.

Ten, “the US implicit GDP price deflator receded to its slowest rate in 60 years in a sign that this profits recovery is still being underpinned by cost cuts, tax relief and accounting shifts than by anything exciting on the pricing front”.

While not everybody might share Rosenberg’s uber-bearishness, his points are worth remembering, if only to remind you that there are plenty of investors out there ready to sell if the market turns.