Morning Note - A look back in time

About 3 months ago, on the 10th of August, my Morning Note outlined some reasoning for further upside in equities. I think its worthwhile revisiting this in the context of where we are now.  

Written 10th August 2010 - Morning Note 

...."Here's some of the reasons why I think we're likely to see this market trade higher over the medium term. 

1. US economic conditions are improving - I know its tough going and there are whispers coming from Washington that more stimulus is in the pipeline but we are seeing an improving jobs situation with a lift in private sector employment.  I think this trend will start to build momentum over the coming months and this will provide further support to the rally. 

Todays perspective...
On Friday night we saw one of the first employment reports that actually beat market consensus to the upside and there was an upward revision on last months print. Although the unemployment rate is being maintained at 9.6%, we are starting to see some type of trend - jobs are starting to be created mainly in the private sector. 
 
For those looking to see this trend, CLICK HERE

2. Corporate profitability is also on the mend - The recent US reporting season was positive and we saw the vast majority of companies beat earnings expectations. Yes, there were some concerns around revenue however the fact that earnings improved showed the benefits of aggressive cost reduction strategies. I particularly liked to results from the transport stocks which shows goods are moving around the US and Tech companies that showed IT spend was improving. 

Todays perspective...
This was written 3 months ago at the end of the prior reporting season. US company reports are currently underway and at last count, more than 70% of companies have beaten the markets expectations. It was also interesting to note that Moody's released a recent report showing that US corporates had excess cash of near on $1 Trillion. The main challenge now for Government is to offer enough confidence in the market to prompt Corporates to start spending rather than hording cash. This is whats needed to tackle the unemployment issue in the US.  

3. Emergency Fiscal Policy settings - In both the US and UK interest rates are at emergency settings. 0-0.25% in the States and 0.5% in the UK. Capital is cheap so institutions can borrow money and invest in higher yielding assets such as equities and bonds. Why not borrow at 1.5% and invest in Treasuries that are yielding 3% or equities with a yield of 4 - 5%? The US Fed have indicated that interest rates will be kept on hold for an extended period of time and I'd argue that they need to be, given they're running a record Govt Debt which needs servicing. 

Todays perspective...
Last week we saw the US Federal Reserve announce plans for $600 billion worth of stimulus to be rolled out over the next 7 months.  A report by CNBC suggests this amount is the equivalent of cutting interest rates by a further 0.5%.  

4. Strong (& sustainable) growth in emerging markets - There was a lot of concern that China was going to stifle growth. This has so far proved incorrect and we've seen a measured approach by Chinese officials to gradually manage its expansion.  If we look across the emerging markets space, with Asia being central to this theme we see India growing at 9.4%, China at 10.5% & Other Asia at 6.4%. In Latin America Brazil has GDP growth of 7.1%. If we compare this to the US at 3.3% and the Eurozone at 1% and ask ourselves 'what economies would we like our money exposed to'  and the answer to me is pretty clear. 

Todays perspective...
This remains the theme that I like to invest towards. Emerging Market Growth.... the place to be 3 months ago and still the place to be now. 

5. This is why we're conscious of whats happening in the US and Eurozone as they have such as a significant bearing on the global markets but when we invest, we focus on stocks that are exposed to this theme of emerging markets growth".......

..............End of the Note

Its is often relevant to look back and review our past assessments of the market to see the accuracy of our thinking. This will give us a more focussed view of the future....

By James Gerrish
(02) 9375 0117