Monday, May 25, 2009

Outlook for stock markets.

Financial markets are going through the one of top growing period last years, recorded a sharp increase in risky assets such as shares and commodities. Over the past two months, stock markets rose in the range of 20 - 50% and commodity markets strengthened by 25%. The optimism and increased appetite of investors have several factors. This is essentially a very cheap price of shares and commodities, cheap money and last but not least some signs of stabilizing economies. The question remains whether it is sustainable growth, or just a short break.

Before the beginning of the current growth rally, the ratio of the share price and earnings per share (P / E) is the lowest over the past 10 years (P / E be in the range of values 11), also the rates on the interbank market began to decrease, 3M Libor fell close to the level of 2002. Signs of stabilizing economies supported investors in stocks purchases. Together with some government officials announcing the economy bottom and global recovery.

All these factors caused a significant decrease in the risk aversion. Investors seeking high yield began to beat the risk-adjusted assets and insert your money into commodities and shares. The decline in risk aversion to shows such as the volatility index (Vix) and the TED spread. Volatility Index Vix (given the volatility of the S & P 500 index) dropped to the value of September 08 (before the biggest sell off), similarly with TED spread (difference between the value of 3M LIBOR and yield on three-month Treasury bills).

Pic1: TED spread chart

Confidence in markets and the risk aversion is at the similar level, as it was before market sell off on September and October last year. Very optimistic mood in the markets is also improving investor confidence, the German ZEW index rose to its three-year maximum.

Pic 2: P/E for Dow Jones Industrial Average Index

Due to massive growth rally the ratio P/E for Dow Jones is at the value of 21,5 (most since 2003). It is a combination that suggests the possibility of aggressive sale on the stock markets because we are still heading very poor GDP of individual countries and ever-growing unemployment. At present it is not the growth of equity markets supported by the fundamentals of the real economies. What, on the contrary can speak for the continued growth of equity markets, is the price of money - interest rates on the interbank markets are currently at record low levels (in the markets is reflected in the massive pumping of liquidity into the economy).


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