James Gerrish - Morning Note

10/08/10   - 8.20am   -  by James Gerrish 

I constantly get asked whether the current move in the market has legs or we're setting up for another disappointing move to the downside. A tough question and one that no one can answer for sure but 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 (particularly Manufacturing).  I think this trend will start to build momentum over the coming months and this will provide further support to the rally. 

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. 

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 given they're running a record Govt Debt which needs servicing. 

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. 

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. It's a theme that has caught on over the last month of so with a clear move into risk orientated assets such as commodities and commodity backed currencies like the Aussie Dollar. 

6. To back this theme we created an Emerging Growth Model Portfolio on the 1st July 2010. The portfolio invests in ASX listed securities that are leveraged to emerging markets growth. CLICK HERE to view the portfolio & please ensure you have read and understood the DISCLAIMER  

On the market last night, the DOW JONES added +45.19 points or +0.42% to close at 10696. The FTSE 100 added +78 points or +1.47% to 5410. Locally, SPI FUTURES are matching 4 points higher.