Market confidence is growing

THE bear market is over and that’s no bull, according to KBC Asset Management who say a ‘Santa Claus’ rally is on the way.

In an upbeat commentary KBC Asset Management chief investment officer, Noel O’Halloran says: “The markets are recovering - and it’s official. And it is not too greedy of investors to expect what we call a ‘Santa Claus’ rally, followed by the now traditional January rally, that is brought on as new monies are invested globally in line with a new investment year.”

Mr O’Halloran says the KBC view is based on a large number of international financial and economic indices that KBC constantly use as a guide to their investment decisions.

“The bulk of the numbers point to the 9 of October as being the day when global markets, that had fallen by up to 50% in value, finally turned. From here we can still see some down days in the markets, but all the evidence suggests that the bear market is over,” he adds.

Mr O’Halloran has drawn up an extensive list of facts, taken from a wide variety of sources, to support his argument.

He says, in October, there was a stream of awful economic numbers coming from the US, including industrial production figures, and the key ISM industrial sentiment survey.

“Additionally, broking analysts downgraded earnings estimates at the fastest pace since last year’s recession. But, wait for it, markets rallied despite all of these negatives.

This was the sign investors had been looking for. And it is not a small number of stocks that are leading the rally. It is broad based and has moved on from the defensive stocks such as utilities, health care and consumer staples, like Coca Cola,” he says.

Mr O’Halloran says confidence is growing because there is a belief that there will be growth in corporate profitability.

“Higher stock prices show investors are willing to pay up as their confidence in the future profitability increases. At the same time and for the same reason bond yields are rising. At this stage in the cycle, rising bond yields give us further confirmation that company profits are on the up. And what day did US bond yields bottom out? Well the 9 October of course,” he adds.

Mr O’Halloran says Government bonds, by their nature, are safer than corporate bonds, the latter have to offer a risk premium. “The differential between 10 year US government bonds and corporate bonds rated by Moody’s as Baa (an industry standard) peaked on October 9, when the spread between the two was at a twenty year high and at the second highest level in fifty years. The previous peak was in October 1982, two months after the beginning of the greatest bull market in stock market history,” he says.

He also looks to the Korean economy which he says is often used as a leading indicator, showing future trends, as the bulk of businesses in Korea are at the early end of the manufacturing food chain, providing industrial components for use in assembled goods.