No Growth? No Problem!

06/01/2009 11:37 am EST


David Fuller

Global Strategist and Producer, Fullermoney

Stocks and commodities could keep climbing even if the economy continues to struggle, writes David Fuller of Fullermoney. Colleague Eoin Treacy fancies Hong Kong.

I have been a big advocate of the base-building hypothesis, which means that the bear market is over, in my view, and therefore a new bull market is underway. On the other hand, I have been very cautious about economic recovery in the OECD countries.

How do I reconcile these two seemingly opposite views? Easily! All the building blocks for a stock market recovery have been in place for months, as I have often pointed out—record low interest rates, record reflationary efforts, record institutional investor cash on the sidelines, cheaper equities following selling panics, and very low inflation.

Yes, the economic background is grim, ensuring that green shoots seen by optimists will prove, on closer examination, to have been no more than mold. However, bad as the OECD economies are, this is not a 1930s-style depression, as many feared. This has led to a reappraisal by those fearing Armageddon.

My economic forecast remains one of decelerating bad news, in contrast to the accelerating deterioration that we saw in [the fourth quarter of] 2008 and [the first quarter of] 2009. Nevertheless, annualized comparisons should ensure that [the fourth quarter of] 2009 and [the first quarter of] 2010 look better, if only because they will be measured against economies previously in shock. Meanwhile, companies continue to cut costs. The better ones will be in a position to produce good earnings when economies eventually pull out of this slough of despond.

I maintain that stock markets and commodities are the leading candidates to become the next bubbles. However, following a splendid rally from the March lows, we should not be surprised if stock markets experience a lengthy reaction and consolidation. After all, markets range much more than they trend, and recent stock market trends have been exceptional.

Now that investors are moving away from the expectation that the world is about to go through another depression, markets with sound fundamentals are garnering attention. Hong Kong has exposure to the Chinese economy, ultra-low interest rates and a budget surplus. Leverage to global growth and asset price inflation may also be seen as positives.

The Hang Seng index accelerated to a peak near 32,000 in late 2007 on the expectation that the premium of A-Shares over H-Shares was about to close. However, as this rumor fizzled out, the market gave up much of the advance. It broke downwards again in September and this time accelerated lower before finding support above 10,000.

The index built a base for more than five months and successfully broke above 16,000 in early May. It consolidated this move for much of the month in what looks like a first step above the base. The index broke upwards again [last week,] and the up side can be given the benefit of the doubt in the absence of a sustained move below 16,000.

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