Global equity markets looking more positive

The February month could mark a turning point for offshore equity markets after a sell off in early 2002. Usually sharemarkets precede any economic recovery by around six months but this time it may actually be the other way around while investors wait to see if improved economic activity does boost corporate earnings.

After a weak January, February was another poor month for global equities with the world index down 2.1% (in New Zealand dollars). For much of the month global investors generally ignored positive economic data.

Instead investor focus was more on the accounting practices of large US companies and how they are used to boost reported profits. This caused some doubt about the quality of reported earnings of even "blue chip" companies.

Even so the Dow Jones index (which contains 30 leading US companies) was up 1.9% for the month, in contrast with the broader S&P 500 index which was down 2.1%.

While economic data released in the US during February was mixed, the data became more positive through the month. The consensus view is firming that the US has turned the corner with leading indicators pointing to a recovery.

This is hardly surprising given the massive stimulus given to the US economy from the significant interest rate cuts in 2001 by the Federal Reserve.

However, the key issue for investors is whether the better US economic picture will translate into improved corporate earnings.

Increased competition may mean profit improvements might not be as significant as in previous recoveries. Even so the "trickle down" effect will be positive for the technology sector, which will benefit both US domestic technology related companies and Asian exporters into the United States, in particular.

This is much needed for battered Nasdaq companies with that index down over 10% in the February month.

There was a similar story in Europe, where economic data released was mixed but key leading indicators continued to improve. While most European equity markets were down for the month, a base of support does seem to be forming.

Japanese equities rebounded almost 6% during February, after suffering losses over the previous three months. The government announced an anti-deflation package that was generally well received by the market. Details of the package are broadly in line with prior expectations.

The key issue is whether this will be sufficient to turn around an economy that has basically been in recession for the past decade. Investor patience and confidence in such moves is definitely on the wane.

In the meantime the Japanese export sector may a bright spot for that country’s sharemarket, given a weak yen, which is down over 15% against the US dollar over the past 12 months. A strengthening US economy will also provide downstream benefits for Japanese exporters.

After outperforming in late 2001/early 2002 the New Zealand equity market fell 3.1% for the February month, in tandem with most offshore equity markets.

In this country February saw better than expected economic data and a reasonable outcome from the corporate results round. The improved domestic economic picture may see the Reserve Bank of New Zealand raising interest rates in May, sooner than originally anticipated.

In summary, a positive feel at the end of the month after a sluggish start and first indications are for improved sharemarket performances in March.