Increased risk appetite sees strong start to 2012
Global markets have been enjoying rather a good time so far this year. After a pretty difficult 2011, various asset classes have registered some significant gains year to date.
For example, the FTSE 100 share index had at the beginning of last week advanced 5.8% so far in 2012. In the US, the S&P 500 is up 5% this year and has re-entered a bull market by having risen 20% since the lows of last October. Corporate bonds have also advanced.
It's worth noting that last year's best performing asset class-gilts-has slipped this year due to an increased risk appetite on the part of investors. Of course, one has to be very careful when looking at short-term numbers, but it is still worth thinking about what has changed in recent weeks to account for such a shift in investors' sentiment.
Three reasons for optimism
There are three key areas responsible for this increase in optimism. Firstly, a reduced threat of a eurozone banking collapse and credit crunch. The European Central Bank (ECB) has provided huge loans to the region's banks, having lent almost €500 billion to around 500 banks for three years at just 1% with a promise of more to come. Also, the European Banking Authority recently said that banks' plans to raise capital by July were on track.
Secondly, economic data in the US has proved to be much more robust than expected. Unemployment is falling faster than hoped for and new orders for American manufacturers are driving the sector's growth to its highest for seven months. Exports have improved too-in December they grew 14.5% to $2.1 trillion.
Lastly, it is unlikely that China will experience a 'hard' economic landing as its policymakers endeavour to slow its economy in a manageable way. The world's second largest economy has enjoyed robust growth for many years but signs of higher inflation led the authorities to raise interest rates. Recent signs of a potential slowdown, however, have led to policymakers allowing growth to resume once more.
China is expected to grow this year at around 8.5% and the IMF is expecting the global economy to expand by a respectable 3-4%.
So investors have decided that for now, the outlooks appears far more positive than could have been hoped for just a few months ago, and as a consequence markets have started to price-in in this better environment.
Of course, there is the usual caveat for every investor and that is to ensure your portfolio remains aligned to your overall attitude to risk and is sufficiently diversified.
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