Market Comment 4 January 2012

The first trading week of the year has started well, with a sharp upward move in equity prices globally. Optimism has been driven by relatively healthy economic data from all three key economic regions (Asia, the US and even Europe) and fuelled by the high level of liquidity released into the financial system late last year.
 
Start-of-year ebullience is welcome, and we would certainly not recommend contradicting it. Technically at least, the market appears to have some momentum. But, it is important not to get carried away with the enthusiasm.

Looking at economic and geopolitical factors, oil prices are pushing higher, a clear threat to economic momentum. More importantly, the European crisis remains entrenched in a negative economic cycle, especially since the December summit, where the prospects of long-term deleveraging were essentially institutionalised.  The most recent ECB data shows record short-term deposits. Banks are not yet aggressively passing liquidity into the real economy, and it is hard to see Europe having a good year without a determined growth effort, both from the private and public sectors.

Adding to worries, we now have to start watching Hungary more closely, as its government steps up its unconventional policies, to the disapproval of the IMF. One of the drivers for our long-held expectation of a constructive outcome in Europe was the broad-reaching implications of the crisis not being resolved. We are starting to see the contagion, even whilst headline equity indexes are doing well.
 
Asia looks more hopeful, as Chinese data reminds that its growth story is far from over. And the US has finally won over its sceptics with healthy growth data. Related to this, the Federal Reserve has announced that it will start to provide the market with more guidance about how it forecasts interest rates to evolve. This move to increased transparency will hopefully reduce volatility about market expectations, which have been flipping aggressively between optimistic and pessimistic ever since the 2008 crash. Such volatility in sentiment is damaging to investor confidence and real world economic growth, so this development is welcome.
 
Fundamentally at this time, 2012 shows many similar threats and parallels to 2011, including the first week of trading, which was also positive a year ago. But, in the few times that the US equity market has had such a flat year as it did in 2011 (despite all that volatility, the S&P 500 ended the year at the same level it began it), it has invariably been followed by a strongly positive year. The fundamentals will change over time, and it is partly with this in mind that we caution fighting against the current trend.
 
For now, though, we are looking for a range-bound market and caution against long-term expectations. Target levels and stop losses make a lot of sense today.
 
We continue to like corporate debt – contact us for information about the Moorea 2016 Corporate Opportunity Fund. If markets momentum holds up, then Equity Target products with short maturities are also an attractive solution. Gold Target products may also make sense in this environment. Notwithstanding that gold remains an inconsistent asset, depending on momentum to overcome its negative yield.
 
May 2012 bring all that you ask of it, and more.