Investors, markets hoping for short war

Although up last week and the week before on positive economic news, markets continued their volatile trading again and in the US, the DOW and NASDAQ indexes gave up all their recent gains early this week. The DOW fell to hit the mid 7700’s on Tuesday. Geopolitical issues continue to play on the markets but a fall in US consumer confidence numbers rattled the equity markets and saw a large shift of money flows into bonds. Japanese equities fell to a two-week low last Friday with the Nikkei 225 closing at 8,513.54. Two of the weakest sectors over the week were banking and the key exporters with the latter suffering from the recent appreciation of the Yen against the US Dollar.

In the United States, the Producers Price Index rose 1.6% and the Consumer Price Index rose 0.3% in January. Higher energy costs were partly offset by cheaper cars and clothing. Heating oil and gasoline prices saw the biggest increases at 8.6% and 6.6% respectively. The CPI 0.3% increase fell short of analyst expectations of a 0.4% jump in prices. In the UK, we note inflation came in at 2.7% in January, this would be the third straight month where it has been above the government’s target of 2.5%. The Pound fell out of bed as well, losing almost 2% against the USD last week.French GDP growth progressed a marginal 0.2% in the 4th quarter, compared to the previous 3 months. 3Q growth was revised upwards from 0.2% to 0.3%. The data puts into doubt the government’s forecast, which predicts growth of 2.5% in 2003. Weak consumer and business confidence, dampened demand and the recent appreciation of the Euro against the Dollar has held back exports. The weak French data together with recent disappointing economic news from Germany has strengthened the case for further monetary easing and the European Central Bank is expected to act and cut Eurozone interest rates by early in the 2nd quarter. Rates are currently 2.75%.

Despite what the technical bears have to say and the stumble early this week, there is a whiff of optimism in the air. Ken Fisher, the American fund manager and son of investing legend Phil Fisher, boldly stated that US equities will rise by 40% this year. As we have said before, it is early days and the economy and thus the markets are very delicate but maybe investors are starting to see through the now inevitable upheaval of war in the Middle East to the brighter economic future beyond. Oil shares have studiously ignored the fact that the oil price has remained above $30, indicating an underlying belief that after a short war the price will fall back as Iraqi supply is secured and the global economy gets back on an even keel.

Overoptimistic? Well, maybe, but it’s an optimism that is starting to be shared by investors who are spotting value. Interestingly the S&P was up on Tuesday almost 1.3% whilst the DOW and NASDAQ were down about the same. This is difficult to do as the S&P is mostly made up of DOW and NASDAQ stocks. But, the Small Cap Stocks and selective companies were definitely moving forward on stand alone valuations vs investor trend and sentiment based in global (top down) factors. CSFB’s recent release holds to the long-term out performance of equities. Despite the emotion in the markets right now, shares have not dipped quite as far below trend as they have done in the past. Although there still may be some boot shaking to happen, anyone taking a reasonably long-term view — say over 10 years — is not going to be disappointed by getting back into the market at this level.

The last decade in which shares did not produce a positive real return was 1910-1920, a period which it would be fair to say experienced some disruption (i.e. war). With the market trading at half the level it started the current decade, the odds are surely on returns over the next seven years being at least reasonable.

e-mail: darcy@investments-intl.com