Will 2007 be a banner year for equities?

Will 2007 be a banner year for equities?
Reuters



London: Equities will end 2007 well above levels investors had been expecting if the fiery pace at which they rose in the first third of the year does not slacken.

So many investors, faced with the supposedly traditional May sell-off, will be trying to decide whether to lock in profits or bank on another year of outsized gains.

MSCI's main world equity index gained 6.4 by the end of April and its main emerging market index about the same. If uninterrupted, that puts them on a pace to gain around 19 per cent for the year.

The FTSEurofirst 300 was up 6.8 per cent by April 30 while the S&P 500 gained 4.5 per cent - a more than 20 per cent and 13 per cent annual pace, respectively.

Some markets, meanwhile, have had breathless gains. Germany's DAX, with a 12.3 per cent rise over four months, is on a pace to gain 37 per cent annually. China's Shanghai index would rise more than 130 per cent in 2007 at its current rate.

"Despite the slowdown in corporate earnings growth and rising interest rates... these markets are powering away," said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin.

It was not supposed to be this way. Entering the year, investors were expecting only modest gains for 2007.

Reuters polls in December, for example, showed analysts on average expected the S&P to be up 6.4 per cent for the year.

They saw the DAX gaining 7.4 per cent to 6,900. On Thursday it was trading above 7,430.

Not over

It is quite a leap, of course, to look at a four-month market performance and extrapolate gains for the full year. This time last year, for example, there was a similar situation before the batterings of May to August.

"The year is not over," said Ewen Cameron Watt, strategist at BlackRock. "The fat lady has not even cleared her throat."

This means that some investors are preparing to step back. ABN Amro Asset Management said in mid-April that it was a good time to reduce equities while Generali Asset Managers reduced its equity stance going in to May.

Stock investors, however, have shown a great deal of resilience recently.

First, they shook off an attempted global correction at the end of February and early March with seeming ease. Large institutional investors kept their nerve as markets fell and, if anything, went on a bargain hunt.

Many bourses are now back up at all-time highs.

Secondly, the kinds of things that traditionally send equities into a risk-aversion spin have had only limited impact.

Political turmoil in Turkey, for example, has not only failed to unnerve other emerging markets over the past week but Istanbul's main bourse index has regained a good portion of its recent losses.

"There is a lot of value there, we do not want to retreat," Mark Mobius, president of Templeton Emerging Markets, told Reuters on Thursday in a comment that might have come from many investors expressing a broad view of equities in general.

Other assets, meanwhile, have failed to woo investors away from equities, even if prospects might not be as good for stocks this year as they were last year. Bond returns, in general, have been minimal.

Mergers and acquisitions

Mostly, however, equities have thrived because there have been few signs of the global economy slowing and credit has remained cheap enough to trigger a seemingly relentless level of corporate deals.

Market researcher Dealogic calculates mergers and acquisitions year-to-date have been worth $1.9 trillion. "If [dealmakers] felt there was something fundamentally wrong, they would not be bidding so intensely," said Brewin's Lenhoff.

With nothing to suggest this is about to change and the global economy still barrelling along despite some US slowing, investors might be tempted this year to eschew the old market adage that they should "Go away in May".

Recent history suggests anyway that doing so brings mixed results.

In the four years since the current global equity rally began in 2003, the MSCI benchmark has gained throughout the summer twice and underperformed twice.