It is helpful to put last week’s market volatility against the backdrop of the following key factors:
- The recent softer US data is consistent with the view that economic data overseas will oscillate between good and bad for a while yet, but that the net effect is the continuation of a grinding recovery over the next year or more.
- Despite Euro zone debt concerns, core countries such as Germany continue to deliver strong growth. (In fact Germany was one of the best performing share markets in the world over the past year – despite its aid to Greece.)
- Share valuations remain OK (on the cheap side of longer term averages). US earnings in particular, remain robust with 75-80% of reporting companies in the current earnings season beating expectations.
- US government bond valuations are now considered to be at extremely expensive levels. The debt ceiling issues will be worked through and US default is an extremely low probability going forward.
- The most likely outcome for Europe is that sovereign debt worries will continue to muddle through for now, but with any agreement on a long term solution still a way off yet.
- Emerging economies remain the key drivers of global growth. It is anticipated that economic growth will reduce slightly in China however, slowing to 8% p.a. or so – which is still impressive.
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