- Equity markets have rallied in recent weeks, encouraged by favourable developments, notably in the political arena in Europe and in the U.S. Since pulling back 3.5% early in Q4, the global index (MSCI All Country) has gained 6.8%, flirting with its post-recession peak.
- Despite better political news in recent weeks, the business outlook is one of continuing difficulty in 2013. The economic backdrop is still fragile. Surprisingly, the bullish turn of the equity markets has coincided with continuing downward revision of earnings forecasts.
- Even the coming Q4 earnings season in the U.S could very well disappoint. So far in the quarter, for example, our proxy for U.S. manufacturing sales shows a repeat of Q3’s slight slowdown in quarter-over-quarter growth. That would be the first back-to-back decline since 2009.
- The Canadian equity market has also rebounded in recent weeks, making up almost all the ground it lost from September to November. However, its relative performance in 2012 has been disappointing. The 4% year-to-date return of the MSCI Canada index places it 37th among the 45 MSCI countries.
- We have made no changes to our asset allocation this month. We remain comfortable with our benchmark recommendation of 55% equities and 40% fixed income. Within equities, we continue to recommend underweighting Canadian issues
Equity markets have rallied in recent weeks. Since pulling back 3.5% early in Q4, the global index (MSCI All Country) has gained 6.8%. It is now up comfortably from September 30 and is even flirting with its postrecession peak. The emerging-market and Europe indexes in particular have advanced impressively, signalling a return of investor appetite for riskier assets.
North America has lagged. Its equities are up from mid-November but slightly down over the quarter to date. All regions, including North America, are on track to finish 2012 with double-digit gains.
The equity market advance has been encouraged by favourable developments, notably in the political arena. In the U.S., talks to ease the effect of the fiscal cliff have been moving ahead, in marked contrast to the acrimony prevailing in Washington before the November elections. European politicians have also surprised, turning the sod for a banking union.
In the first case we are still waiting for results, and though an agreement is very likely, a braking of growth remains inevitable. In the second, for now, they agreed on the establishment of a single supervisory mechanism that will put banks under the oversight of the ECB (aiming for it to be operational in Q1 2014). However, the coming talks on the remaining aspects of the banking union are likely to be even more arduous since they will bear on mechanisms for resolution of bank failures and on establishment of a pan-European deposit insurance scheme.
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