Equity markets around the world had rallied from the lows of 2009 offering 60% gains for bottom feeders brave enough to take stock. Mike Lenhoff, the Chief Strategist at Brewin Dolphin provided an excellent over view of the world economy and markets at the pro.manchester presentation hosted by DWF in Manchester on the 3rd February.
The FTSE World Wide index now stood within 25% of the 2008 peak. In developing markets, the gains had been even higher, rallying from a low of 160 to around 340 according to the index, with the market now ready to test the 2007 high of 360. Markets had been supported by a strong growth in corporate earnings and a period of low interest rates.
Challenges to equity markets will be high levels of growth in the developing world, generating higher inflation. In turn this will require central bank action to push interest rates higher. Commodity prices, especially food prices were being pushed higher by world demand, with demand price effects exacerbated by supply shocks from natural disasters.
Mike Lenhoff dealt with the situation in China in some depth. Uncertainties remain about the sustainability of growth, with the threat of inflation requiring central bank action to limit expansion.
Within Europe, fears over central bank default were easing despite the increasing spreads on gilt rates for the PIGS. Portugal, Ireland, Greece and Spain. Gilt yields on Greek bonds had risen to 13% according to the presentation.
Bull or bear? The Brewin Dolphin forecast for the FTSE end of 2011 is 6,450, that’s an eight per cent rise from current levels. Delegates were invited to submit there own forecast of the FTSE by the end of the year. The closest forecast collecting a bottle of Champagne at the 2012 event. 6,450 is a good call, with the market set to test the 6,500 high before the end of the year.
In the UK Lenhoff expects reasonable growth, with inflation remaining a challenge to policy in 2011. As for base rates, Mike Lenhoff is calling a 50 basis point rise in two steps in the second half of the year. The market consensus is for rates to end the year at 1.25%.
If GDP growth is as high as we anticipate in the first quarter of the year, the shocking inflation figures could force the Bank of England to act earlier. Rates could begin the rise as early as April or May pushing beyond 200 basis points by year end.
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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.
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