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BY SHAVASB BOHDJALIAN
An influx of fresh funds ahead of the end of the first quarter by fund managers in addition to a shift by investors out of Treasuries into stocks could provide additional support to US stock markets and in turn to global stocks.
The S&P 500 index is currently up around 11% since the start of the year, in addition to 11% gains recorded in the last quarter of 2011. If the S&P 500 index ends near the current level of 1400 by end of the first quarter, the back-to-back performance will be the second best since 2009 according to Reuters and Bloomberg reports.
With the Fed having promised that interest rates will stay at record low levels until 2014, there is a good possibility for investors to shift out of bank deposits and US Treasuries into stocks in search of a better yield through dividend income and capital appreciation from rising share prices.
When credit is cheap, stocks soar. And when credit is expensive, they plummet.
The outlook for shares is extremely positive since in addition to low interest rates and tame inflation, US corporate balance sheets are at their best and are most likely to stay at very strong levels in view of the recent improvement in the US economy as evidenced by rising manufacturing and services activity, a rebound in US housing, a reduction in unemployment numbers and rising consumer sentiment. On the back of this positive performance, US corporate profits should continue to increase, leading to higher dividend and in turn more funds flowing into stocks.
The increase in dividend income is particularly important since in addition to low interest rates and tame inflation, rising dividend income is the next key ingredient needed to attract investors to the stock market.
In recent weeks we have seen traditional dividend paying companies such as Microsoft and Wall Mart increasing their dividend payments, while companies such as Apple that have never paid a dividend, announced their intention to pay dividend for the first time.
In addition to the long term fundamentals which are all stock market supportive, we also have another positive short term consideration, which is the approach of the end of the first quarter. According to research by Societe Generale, US pension funds running balanced (bond and equity) funds have a significant index rebalancing need into month and quarter end, given the scale of the equity market rally and bond market sell-off this quarter.
Under such a scenario, an influx of fresh funds into stocks as fund managers attempt to include the best performing stocks in their portfolios could see the market supported at this critical juncture.
Uneasiness among fund managers and investors however regarding the disappointing economic news from Europe and Asia and their impact on the pace of economic recovery in the US may keep the influx of new funds into the stock at check. With the eurozone crisis moving to the sidelines, attention is now shifting to China, which is why investors should pay particular attention to the news flow from the Asian tiger. If the situation in China worsens, then it’s safe to assume that fund managers will shift back to the relative safety of US Treasuries, whereas if the news from China is good, or at least not disastrous, then the overall positive sentiment will be maintained.
In theory, a rising and better performing US stock market should have a positive impact on the US dollar and help the market break out of the recent broad consolidation range of 1.28-1.33 on EURUSD on the downside. An analysis from BNP Paribas shows that net short EUR positions on the futures market have been trimmed, which may be a good sign that a break lower is now possible.
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(Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
