IG Markets - Afternoon thoughts 25th March

Across the region, equity markets are all higher following the bullish overnight leads from the US. Commodities are once again leading the way as markets come to grips with the increased demand stemming from the Japanese earthquake. The Shanghai Composite is the best performer, up 1.2% while elsewhere, the Nikkei 225, Kospi and Hang Seng are up between 0.7% and 1% respectively.

In Australia, the ASX 200 is currently 1.1% firmer at 4751, having earlier touched an intra-day high of 4763. At present levels, the market has surged more than 6% off its lows of last Thursday, demonstrating just how quickly investors were willing to put money back to work after Japan’s triple disaster rocked market confidence. Today’s gains are broad based with the energy, materials, financial, industrials and consumer sectors all seeing gains in excess of 1%.

This week has really seen volatility die down and fear based selling evaporate. It looks as though the reallocation trade in the US has resumed, with participants looking to get out of bonds and into equities ahead of what’s expected to be a strong Q1 reporting season. With the end of the Fed’s QE2 program fast approaching, people don’t want to be holding bonds as inflation is beginning to pick up again.

US equity markets are looking very attractive at the moment; the S&P 500 is cheap on a forward P/E basis and dividends are expected to rise in coming months. US markets are among the most attractive in the world at the moment, especially versus Australia.

Unfortunately, the local market is still facing a number of stiff headwinds that have seen it underperform over the last twelve months. These include an incompetent minority government being dictated to by green interests, a strong AUD and uncertainty as to how the proposed MRRT and carbon tax will impact miners and the general business community.

The Australian market has always been heavily owned by foreign money. However, due to all the above reasons and more, foreign money just isn’t attracted to Australian assets at the moment. Until it returns, we’re going to find it very difficult to outperform overseas markets.
Ben Potter
Market Strategist
IG Markets

ENDS

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