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Do Global Equity Markets Need a Reality Check?

Stock markets from New York to Tokyo have seen some stellar gains this week amid hopes of further monetary easing globally, but analysts say there’s one thing that investors appear to be forgetting: economic growth remains weak and is likely to remain so for some time.

A trader looks worried as he works in a dealing room in Tel Aviv, Israel.
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A trader looks worried as he works in a dealing room in Tel Aviv, Israel.

“I think we will have a reality check in the next couple of weeks,” said Sean Darby, Chief Global Equity Strategist at Jefferies in Hong Kong, referring to the rally in equity markets. “The investment community may be underestimating the extent of the slowdown in the global economy.”

Indeed, weaker-than- expected economic numbers out of China on Thursday, far from denting the upbeat mood in equity markets, added fuel to the rally as investors bet the data would encourage China’s central bank to hasten any plans it has to ease monetary policy.

Hopes are also running high that the U.S. Federal Reserve and European Central Bank will deliver stimulus measures next month.

Against this backdrop, the S&P 500 on Thursday notched up a fifth-straight day of gains, European shares are trading near their peaks for 2012 and Japan’s benchmark Nikkei index, while marginally lower on Friday, has rallied more than 4 percent this week and is on course to post its biggest weekly gain in six months.

The MSCI World Index meanwhile has been edging higher since early June, hitting its highest level in three months on Thursday.

Stimulus Impact Limited?

Expectations for monetary easing have lifted equity markets out of the doldrums, but the problem analysts say, is that it is difficult to assess what impact the stimulus measures will have on economic growth since many central banks have to resort to unconventional policy measures such as large-scale bond purchases as interest rates are already at record lows.

For instance, key U.S. lending rates are in a target range of zero to 0.25 percent, while the Bank of Japan on Thursday left its benchmark policy rate in a range of zero to 0.1 percent.

“We are now in a period where central banks are limited by normal conventional tools so we have to be cautious that any policy changes may not have the same impact as monetary policy had in the past,” said Darby.

That means perhaps equity investors need to pay more attention to the outlook for growth than they are right now, analysts said.

“If you look at markets worldwide, everybody has been listening to politicians. If they say something positive, markets run up and if they say something negative, markets run down. We have not really been looking at the fundamentals over the past 6 months,” Willem Nabarro, Head of European Equities at Exane-BNP Paribas told CNBC Asia’s “Squawk Box”.

The IMF last month cut its forecast for global growth for 2013 to 3.9 percent from a previous projection of 4.1 percent.

Vasu Menon, Vice President, Wealth Management at OCBC Bank in Singapore, told CNBC that while he was positive on equity markets in the short term, investors should expect volatility in the medium-term.

“Don’t throw all your money into markets just because things are looking good right now. We continue to tell investors to drip feed into the market over the next six to nine months,” he said.

“You don’t want to stay out of the market completely. But if you are waiting for blue skies, it’s not going to happen. The problems in the U.S. and Europe are very deep seated,” Menon added.

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