GO
Loading...

Is Market Rally a False Dawn?

Stock markets across Europe returned to September’s rally on Thursday, despite well-publicized unrest on the streets of Greece and Spain.

(Read More: Protests in Greece and Spain)

Thumbs up Thumbs down
Photo: Johner | Johner Images | Getty Images
Thumbs up Thumbs down

Opinion is divided as to whether this rally is here to stay after recent extraordinary monetary policy actions from the European Central Bank (ECB) and the U.S. Federal Reserve (Fed).

(Read More: Investors Warned on Central Bank Kool Aid)

“We see two main reasons why investors should be more confident about an extension of the risk rally in the U.S. and elsewhere. First, the support from central banks is extraordinary and is designed to improve financial conditions. Second, the monetary policy actions have come amid a fertile environment for risky assets,” analysts at Barclays wrote in a research note.

They argue that the poor economic outlook could actually work in favor of risk, as it makes it more likely that economic data in the U.S. and Europe will be better than low expectations.

“Any positive news on the growth front in the coming months could give risky assets an extra tailwind,” they said.

The outlook for growth at the moment is still depressed. Ernst & Young cut their forecasts for euro zone gross domestic product (GDP) growth from 0.4 percent to an anemic 0.1 percent in 2013 Thursday morning.

(Read More: Euro Zone Misery For Decade)

The causes of the current rally may mean that it’s unsustainable, others believe.

Mark Tinker, global portfolio manager, Axa Framlington, said that the current rally is due to people closing out their positions rather than any change to the long-term outlook.

“This isn’t a big asset allocation decision yet. There’s an enormous amount of cash sitting on the sidelines and what we are seeing is some leakage from those enormous cash piles,” he told CNBC Europe’s “Squawk Box.”

“If you’ve got a bearish call, you’re only right when it’s cashed out.”

He argued that more conservative calls on high-yield companies will work better in the long-term than the short-term noise about risk on the trading floor suggests.

“The income being generated by corporates and being redistributed back to savers is in excess of anything you’re getting from cash or bonds,” he said.

“If you can take on a long-term investment plan, the attraction of those cash-flow high-yielding companies remains very attractive.”

Written by Catherine Boyle, CNBC. Twitter: @cboylecnbc

Contact Europe: Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More