Growth against all odds

The eurozone crisis has not stopped the FTSE, the Cac and the Dax climbing for most of the past three months. Throughout the past 90 days of Greece-induced turmoil, stock markets have kept climbing.

After a dip below 5 000 in October and a relapse in November, the FTSE 100 has pushed its way to just below 6 000.

On Monday, at midday, it stood at 5 910. The Paris Cac and the German Dax have followed a similar upwards, albeit volatile, path.

How can the markets have failed to notice that the future of the eurozone stands on a knife edge? Were they wantonly blind or stupid?

As is so often the case in the closed world of stock and bond markets, they were neither.

First they believed in the Merkozy domination of Europe. Once French President Nicolas Sarkozy acceded to German dominance and adopted Chancellor Angela Merkel’s austerity project, the European Union was safe. All the rows and teeth-gnashing would be for nought. The Merkozy machine is unstoppable.

Second, the outlook for big business is rosy. After a series of asset write-downs, job lay-offs and cash hoarding, the major corporations are ready to benefit from a recovery. In fact, they hardly need a recovery — a flat economy will be fine. But global growth is expected to gather momentum, especially because the Merkozy pressure on Athens means that the Japanese, Chinese and Americans will stop worrying about a financial meltdown.

The latest HSBC equity survey indicates that companies are continuing to beat analysts’ expectations.

‘In the United States, 61% of companies that have reported so far have beaten estimates and 29% have missed [based on a sample of more than 70% of the S&P 500 companies by market cap]. This is in line with its long-run average and a bit weaker than we have seen in recent years,” the survey states.

It adds that 53% of companies in Europe have beaten estimates and 36% have missed, although only about one-third have reported. ‘This is a modest improvement on on the third quarter. Sales growth is coming in at 8% in the US and 5% in Europe.”

The consensus for growth in earnings per share for Europe is now 7% and HSBC says the shock this year might be that it is close to the mark. It forecasts 4% growth.

Another reason lies in the bond markets, which are increasingly seen as offering poor returns. The gap between safe havens and high returns has widened.

Safe havens, such as the US and German government bonds, are so popular that investors must pay to park their cash. Countries such as Spain, which offers high returns, could still default, putting at risk the original investment.

Corporate bonds are limited in supply, driving down the yield and therefore the interest available to investors.

It all presupposes that the euro crisis is over. That is a big bet. —


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