Markets Remain on a Sugar High

04/16/2009 9:00 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Risk is back on the menu in a beguiling variety of flavors, from emerging-market exchange traded funds (ETFs) and industrial metals right down the food chain to the penny stocks of bailed-out behemoths. Even sugar has stirred, challenging a two-year high this week on word of a shortage in India. Or maybe it was all the sugarcoating by investors who've stayed sweet on stocks in the face of so many sour statistics.

Germany's economy may shrink as much as 5% this year, and the formerly hot Singapore is suffering an even bigger letdown. After two decades of genteel decline, Japan is recycling private savings into low-cost government borrowing, its dependence on exports having backfired. US consumers, who used to cheerfully buy whatever anyone sent over as long as they could put it on plastic, have grown more discerning, now that the credit spigot has been shut down.

None of which could keep the perkier Asian and Latin markets from hitting six-month highs this week, as their developed-country elders labored to catch up. It's hard enough to fight a freewheeling Federal Reserve and harder still when its zeal to reward risk and revive growth is shared by the Beijing mandarins. While publicly berating Uncle Sam for his spendthrift ways, China has pumped up its own money supply, fostering the sort of headlong credit expansion that would make former Fed chairman Alan Greenspan proud.

Like it or not, the higher risk tolerance has been seeping into many recent redoubts of doubt. When electronics giant Philips (Amsterdam: PHG.AS; NYSE: PHG) swung to a surprise loss Tuesday and warned that business had recently deteriorated and won't be getting better soon, its shares actually rose in relief that at least things weren't likely to get worse.

And while London's top 100 stocks were hardly making any headway the same day, the FTSE 250, which incorporates many smaller names, was posting sharp gains, bolstered by hopes that asset managers will eventually see some fresh money.

"What we’ve labeled the 'volatility bubble' may be about to deflate at last," HSBC's investing guru predicted Wednesday. "The non-US markets may do better if risk appetite revives." He upgraded Europe and emerging markets at the expense of US equities.

But market rallies come and market rallies go, while dividends that made it through the recent wringer continue to provide an important hedge. Getting paid to wait for the worm to turn is a popular survival strategy these days. As Roger Conrad notes in this week's Global Perspectives, shares of many companies with solid prospects and steady earnings have held up exceptionally well, and not only in Canada. Other sages we track are mining the same theme for alluring yields from the likes of Royal Dutch Shell (NYSE:RDS.B, LSE: RDSB.L) and Sanofi-Aventis (NYSE: SNY, Paris: SAN).

And as for the go-go China stocks, William Gamble reminds us this week of the risks they pose. Shanghai remains the fashionable play these days. But for how much longer?

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