New ‘Powerful Force’ to Underpin Stock Rally
A wave of new money coming into equity markets is a "powerful force" to reckon with and means that risks such as the U.S. budget cuts and uncertainty in Italy are unlikely to derail a stellar rally in the markets, one expert told CNBC.
While there has been much talk of a "Great Rotation," a shift by long-term funds into equities from bonds amid improving sentiment, the real driving force behind recent gains in equities has been an inflow of new money that was previously held in cash, said Laura Fitzsimmons, vice president for futures and options at JPMorgan Investment Bank.
(Read More: Why Talk of a 'Great Rotation' May Be Overblown)
She said the shift suggests markets would be able to weather headwinds such as concerns about the impact of the U.S. "sequester" - $85 billion worth of spending cuts that took effect on Friday after lawmakers in Washington failed to agree to an alternative budget plan.
"There's definitely been an underlying shift in markets," she told CNBC's Asia "Squawk Box." "People talk about a 'Great Rotation,' but actually I think it's just new money that's coming into the market that had been sitting in cash and that's a pretty powerful force to be reckoned with."
U.S. stocks shrugged off the looming spending cuts to close higher on Friday, with the blue-chip Dow Jones Industrial Average closing at a fresh five-year high. Equity markets globally have also bounced back after inconclusive election results in Italy last week dealt risk appetite a blow, with European shares closing on Friday almost 2 percent above eight-week lows hit earlier in the week.
(Read More: Dow Likely to Bust Through Record – Then What?)
"I think equities look over-stretched and I'm not alone in that view. But when you talk to real money investors that went long at the start of the year, they still feel reasonably comfortable with their positions," Fitzsimmons said.
"They feel that we have weathered the storm so far. We've had the Italian elections, the 'sequester' – there are lots of issues out there - but we're not seeing the real pullback you might have expected given trading conditions in previous years," she added.
Jason Hughes, chief markets strategist at IG Markets in Singapore, said it was still too early to say how the U.S. "sequester" would impact risk appetite in the weeks ahead.
(Read More: Obama on Sequester: No Apocalypse, 'Just Dumb')
"Now that we have tipped over the 'sequester' there is more of a risk for markets, but it's true that the search for higher returns means that there is limited downside for equities," he said.
Fitzsimmons said although she expected a pullback in the S&P 500 below the 1,500 level, a significant retreat was unlikely while investors' risk appetite remained largely intact.
The S&P 500 closed at 1,518 on Friday. It has rallied about 6.5 percent so far this year on the back of brighter U.S. economic data, a better outlook for China's economy and generally improved sentiment in the euro zone.
"I'm not looking for a big pullback because dips will always be supported in this environment until we get a real risk off mood. And I can't exactly see where that is coming from at this point," Fitzsimmons said.
- By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC