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It may be a bull-run year

It may be a bull-run year

The equity markets are off to a strong start in 2012, and there are plenty of reasons to believe this may be a stellar year. 

US markets have posted healthy gains so far, with the Dow Jones Industrial Average up six per cent, the S&P 500 up eight per cent and the NASDAQ up 13 per cent, thanks in part to the continuing ascent of Apple and Microsoft shares.

Despite the daily crisis watch in Europe, that region’s markets have performed even better than America's.

Germany’s DAX has climbed 18 per cent, Britain’s FTSE 100 seven per cent and France’s CAC-40 10 per cent.

Even Greece’s index was up 21 per cent before the second bailout deal was announced.

Emerging markets are back in vogue as well. Brazil’s São Paulo Stock Exchange, or Bovespa, has gained 17 per cent this year.

India’s Bombay Stock Exchange (Sensex) is  up 19 per cent. And Turkey’s National 100 Index has added 20 per cent so far this year.

Even Japan's anaemic Nikkei 225 is up 12 per cent.

Optimism was also prevalent at the start of 2011, as most equity markets were climbing.

The Dow was up seven per cent at this time last year.

Sentiment shifted on March 11, when a severe earthquake and tsunami struck Japan, killing as many as 20,000 people and costing the country an estimated US$300 billion.

Political turmoil in the Middle East, slowing mid-year growth in the US that pointed to a potential double-dip recession, floods in Thailand, stalling growth in China, a downgrading of America’s credit rating, and the European debt crisis led to a wall of worry that kept investors away from equity markets and diverted them to cash, bonds, and gold instead.

Are we likely to have a repeat of 2011, or is the environment different?

Indications are that 2012 is indeed different, and markets are likely to be very strong.

The US is doing just fine, with fourth-quarter gross domestic product growth of 2.8 per cent, December non-farm payrolls up 243,000 and the unemployment rate down to 8.3 per cent.

The US has also experienced 30 consecutive months of expansion in the manufacturing sector, and corporate profits have reached $1.7 trillion, an all-time record as a percentage of the economy.

Besides the promising economic backdrop, US stocks look cheap on a fundamental basis.

Earnings per share for Dow stocks grew 12 per cent in 2011, and are expected to increase by nine per cent a year over the next two years.  

The price-to-earnings multiple is 13 right now, compared with a more expensive average of around 15.

Technical indicators for the S&P 500 are also pointing to a robust rise.

The 50-day moving average recently crossed over the 200-day moving average to form the “Golden Cross”, a major buy signal that reaffirms the bullish case.  

Finally, with interest rates so low and the 10-year Treasury bond yield hovering at two per cent, investors are faced with negative inflation-adjusted returns, so risk is back on the table.

On Tuesday, euro-zone finance ministers approved a 130 billion euro (US$172 billion) rescue for Greece.

This should quell market concerns, at least temporarily, until member countries’ parliaments begin the required approval process.

The European Central Bank’s long-term refinancing operation of buying government debt and backstopping banks for three years has greatly supported a central bank-aided European rally.

China’s central bank has lowered the reserve requirement rate for the second time in two months, which will let banks free up money and increase lending capacity.

China’s GDP is still growing by about eight per cent, which is slower than before but still strong.

Barring any natural disasters, unforeseen political events or flare-ups in the Middle East, fundamental and technical data points to further gains in the markets – with some possible bumps in the road, of course.

Anthony Galliano is the chief executive of Cambodian Investment Management.  
[email protected]

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