Weekly Market Comment, Monday 17th January

Monthly Economic & Market Update January 2011 Authors- Graham Frost Jane Kotchkina Market Overview Markets had a very strong close to 2010. Worries over Irish debt problems spreading to Spain and Portugal and a Chinese hard landing were forgotten. Instead investors focused on growth prospects and robust corporate profits. Economies remain in expansion though growth is slowing and we expect low growth and contained inflation for some years as austerity measures kick in. The exception to this is the US, which continues to promote growth irrespective of the debt burden future generations will face. The result of all this is that rising inflation is more likely and as a result bond prices, led by government bonds, are falling and yields rising. Equities can enjoy this environment for some time or until short term interest rates rise sufficiently to harm growth prospects. Corporate sector spending appears to be rising as firms become more confident. This was our precondition for continued growth as it offsets austerity measures in many countries. Emerging markets remain in expansion but high inflation rates are forcing cooling measures. China and India have started hiking interest rates to levels that may cause their markets to stall. Stock valuations are no longer cheap but real yields remain attractive relative to zero deposit rates and low bond yields. In the UK, housing market stability will be ...