Global equities have risen by more than 22% so far this year, largely as a result of strong performances from the main constituents: the US, Europe and Japan. Non-Japan Asia and the broader Emerging Markets have been left panting in their wake.
It is obviously no coincidence that the same strongly performing markets are the ones where central bank and government policies have been most deliberately supportive of asset prices whether in the form of QE style money printing or via "Help to Buy" property purchase schemes such as that undertaken and recently expanded by the UK government.
If this is the only thing keeping markets going, then obviously any moves to end that intra-venous fix must be bad news.
This is where it gets tricky: we've never before been in a situation of such direct central bank and government support, so there's no precedent for what happens when such support is withdrawn either. Logically, one would expect markets to fall in the face of such "tapering" and to continue doing so until economic growth is strong enough to offset the withdrawal.
This is the trick that the Fed, the ECB, the BoE and the BoJ are trying to pull off. All at the same time. The only trouble is that, at present, growth is not strong enough to offset that withdrawal and that the QE style policies are undoubtedly being continued for far longer than the architects originally planned. No nice quick fix, then.
What does this mean for investors?
At present, it's one way traffic into equities, and with some justification, when you consider the alternatives (cash and gold seem unattractive in a low interest rate and low inflation environment, whilst bonds will suffer when interest rates eventually start rising).
Equity market valuations also don't loom particularly stretched against historic comparisons, as this chart from JP Morgan's Q4 2013 strategy piece shows:
Despite the recent strong rallies, the US, European and AAXJ markets (the green diamond) are at the lower end of their historic valuation ranges (the vertical line) and remain below the 20 year average (the horizontal line).
If you look at US corporate earnings, they are currently sitting at a multi-decade high as a percentage of GDP....
...but this is consistent with what's been going on, on a global basis:
The difference is that the US has led the way in terms of earnings growth, and it's only recently that other zones have started to play catch up, as they've struggled with more domestically focused problems.
So, we're back full circle: how much longer can this continue? On pure valuation grounds, it's possible that this could run for longer and well into 2014, subject to growth being strong enough to permit an orderly reduction in QE stimulation in the USA (other economies have further to go before embarking on the same train).
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