After hitting fresh five year highs, many investors will be asking, once again, whether it is time to take profits from the recent rally in equities. However, despite the various risks that remain on the horizon, markets should have the capacity to absorb these shocks, given both the state of growth and a reduction in the tail risks which have plagued investors in recent years.
US Q4 GDP figures, although disappointing at a headline level, were accompanied by strong nonfarm payroll data. In addition, they are now also expected to be revised following the trade data that has been reported since. Much has been said recently of the increasing competitiveness of the US economy, given the upward pressure that Chinese manufacturers are facing on labour costs. This, coupled with the increased inventory depletion seen in the fourth quarter, has left the US in a strong position for the start of 2013.
Looking forward this may be the buffer to reassure markets the economy can deal with the forthcoming fiscal consolidation. Despite losing competitiveness, China does continue to display promising signs and the consensus view is that the world’s second largest economy has managed to avoid the worst case scenario of a “hard landing”. Balancing the economy toward being consumption led and dealing with an increasingly prevalent shadow banking sector are the crucial steps now facing the Chinese authorities on the route toward liberalisation.
Finally, in Europe, tensions have been rising in the periphery ahead of the forthcoming Italian election. The likelihood of a Berlusconi victory, although greater, remains unlikely, although what the instability does show is the road to integration in Europe is still long and filled with pitfalls. Despite these risks, all of which have been well flagged, the markets have so far failed to retreat in any meaningful fashion from their gains this year. More on China