Optimism is back

The World Bank has pronounced that the world economy is back in good health with “global GDP is projected to grow from 2.4% in 2013, up to 3.2% this year” where “much of the initial acceleration reflecting a pick-up in high-income economies”.

The projection for China seems to be more optimistic than the rest of the markets, with 7.7%, citing the economy as moderating but still strong. This is in contrast to others who feel that China’s attempt to deflate the credit bubble will become a long and complicated process and with a possibility that growth could come to a halt.

It is true that the H-shares in Hong Kong is having a tough start to the year and the PMI numbers, we have seen so far, are still showing expansion albeit slowing.

The prognosis for India’s economy, this year, is modest to weak amid high inflation and current account deficits. However, foreign buyers did set these issues aside when the inflation in December was slightly less than expected. A total inflow of foreign funds into the local stock market was $116.4m, as of 14 January.

The US is considered to be one of the fewer countries with a potential upside, this year, where a stronger recovery will provide support to the developing countries. This feeling of optimism was reflected in US equities markets overnight. The S&P 500 and Dow are close to hitting new highs and the market has brushed aside the bad employment report from last Friday, calling it an outlier.

The pullback that everyone was hoping for appears as though it will not be happening. There is a tolerance of over-valuation as long as earnings meet the expectations and rally will continue. The earnings we have so far show the financials and technology sectors as the greatest growth, this reporting season. Clearly, the Fed’s reduction of $10b is not enough to affect the market in a significant manner and the reiteration that they will keep interest rates low, provides a level of comfort.

As we saw last year, investors prefer to focus on forward projections, therefore the disconnect between economic growth and equities prices will continue.

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