Equity Markets Believe in Green Shoots
Posted: June 23, 2009
What are these ‘green shoots of recovery’?
Global share markets have shown some consistent gains and despite being only a fraction of what was lost since the peak in November 2007, there are also a few positive signs indicating a potential turnaround in the global economy.
In recent months the media has frequently referred to “green shoots of recovery”. Some articles view the phrase with some empathy, offering the term as merely a glimmer of hope. The critically pessimistic see it as purely tongue-in-cheek and imagery gone wrong.
Is it reckless to raise our hopes on such small signs? The equity markets don’t seem to think so and in April some superannuation funds even reported their best single monthly returns in 11 years.
Positive Signs and Looming Threats
Central bankers are noting a reduction in the rate of decline in economic activity. Modest signs of improvements in exports and industrial production data have also been reported in China, Taiwan, Hong Kong and Korea. This has stimulated a growth in confidence across the globe with hopes that demand is rekindling. However, it is prudent to view these positive signs in perspective, and to be aware of the risks that may impair further improvement.
| Positive Signs | Threats |
|---|---|
| Global consumer confidence is showing a small rise. | Confidence is still very fragile. The market is easily shaken by any further unexpected financial losses. |
| Global consumer spending is on the rise. | Rising unemployment is expected in the months to come. |
| Japanese, Australian and US business surveys are showing small improvements. | Rising unemployment is expected in the months to come. |
| The US housing market is showing signs of stabilisation. | Further bad household debts resulting from higher unemployment may weigh on further improvement. Credit card debt levels are excessive in many developed countries. |
While these are just a few of the many economic indicators and may not portray the whole picture, faith can also be sought in the knowledge that the global economic authorities are doing everything possible to help these ‘green shoots’ thrive.
Three Layers of Fertilisation Applied
Central banks, governments and economic organisations around the world have taken unprecedented levels of action to help ease monetary conditions and are committed to stabilising the global economy.
Central banks have been employing a combination of strategies. All banks have been particularly proactive in reducing official interest rates to historical lows, and repurchasing securities. In the US and the UK the central banks have also been printing money to prevent further deflation and to ease monetary conditions.
Governments have focussed on policies designed to support financial institutions and, therefore, their counterparties and consumers through government financial backing and guarantees. Programs for businesses and households have helped to increase consumer spending, to service debt and to reduce
the amount of mortgage of foreclosures.
The International Monetary Fund (IMF), the Group of Twenty (G20) governments and the World Bank Group have all implemented policies designed to increase global liquidity and trade between emerging, developing and developed economies.
The recent appreciation of the equity markets is largely in response to the positive data and perceived future increases in profitability as a result of stimulus packages and the central global authorities working together.
So, although there are still risks and the ‘proceed with caution’ signs are still flashing, opportunities appear to be on the rise as glimmers of hope have the potential to shine.
