By Dr. Jim Leontiades, Cyprus International Institute of Management
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Today’s investor faces a unique situation. Rarely have the world’s equity markets been so buoyant. Whether you look East or West, developed or emerging markets, the story is the same, a general upward movement in share prices that has few historical parallels.
But wait, hasn’t the American economy, the daddy of them all, just turned in its worst performance in years. After growing at over 3% annually for the past four years, for the first quarter of ’07 it registered growth just a little over half a percent.
That is a fact which equity markets in the USA and elsewhere have simply ignored. The Dow Jones index has broken one record after another (30 this year) and is now close to 14000.
Based on the slowdown in American economic growth many analysts had predicted a downturn in share prices. A low rate of growth would inevitably impact on stock markets around the world. This interpretation overlooks the fact that share prices are a leading indicator of American economic activity.
In other words they have historically led the direction of the economy and have been used to predict its future direction. This being the case, the Dow Jones would appear to be signaling that the recent slowing of economic growth was merely a blip in what is already one of the longest periods of USA economic expansion. This would also seem to be the interpretation of foreign markets, which continue to climb.
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The market of the world’s second largest economy, Japan, has been growing at the exceptional rate of 5.5%. Considering that country’s miserable economic performance over the past 15 years, this is nothing short of remarkable.
European equity markets have not been lagging, continuing an upward trend that has favoured them over the past several years. A big surprise has been the emerging markets. These, known for their volatility had been expected to weaken after a period of exceptional growth. That has not proved to be the case. Led by what the investment firm of Goldman Sachs has termed the “BRICs” (Brazil, Russia, India and China) they are rapidly moving toward new heights.
Of course this must eventually end. There are plenty of dark clouds just over the horizon that could puncture the balloon, high oil prices, weak housing markets, a plunging dollar, terrorism, etc. Inevitably it will end, the question is not “if” but “when”. In the meantime the Cypriot investor has to consider what all this means for the CSE.
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Here in Cyprus, the market does not seem to realize that we have entered the summer doldrums. Share activity should be at a low, with small volumes and little excitement. This is far from being the case.
Shares of the tourism sector (the hoteliers that are always crying bankruptcy) are going through the roof. Bank of Cyprus shares, which are being dumped on the market in such volume that we might have expected a major decline in their price, have nevertheless kept on rising right through the 13 Euro barrier.
The underlying trend has in general been very buoyant. The CSE general index has broken its old record and cries of caution recalling the ’99-2000 fiasco are heard.
Having said that, it is clear for the time being, some things are very different. Share prices continue to bear a reasonable relationship to earnings. The small Cypriot investor still bears a healthy skepticism about the markets future prospects.
Most of the buying this time has come from professionals. This has been particularly true of buying on the Athens exchange. The prices of Bank of Cyprus and Laiki shares listed there feed into and influence share prices on the CSE. The greater liquidity and professionalism of Athens has provided a steadying effect on Cypriot share prices.
The upsurge on the CSE nevertheless continues. We may expect to see another input of optimism soon when the major banks report their latest half-year results.
Together with the global euphoria, such local market buoyancy raises danger signals. Another ’99-2000 type bubble is not likely to happen, but it cannot be ruled out. That’s not because the Cypriot investor has learned a lesson.
Yes, small investors, have been burned and will think twice before plunging in recklessly. But human nature is rarely consistent. It’s still possible that the “irrational exuberance” which Alan Greenspan noted during the previous bubble reappears, reality is once again pushed aside and speculation takes over. That will, of course, be the signal to exit.
