Global stock markets are at record highs, with the MSCI All Country World Index reaching a new peak on Monday and both the Dow Jones Industrial Average and the S&P 500 in uncharted territory. European and UK markets are also attracting investors again, although they are below their best levels due to the strength of the euro and the pound making exports pricier. Here are five reasons why investors are buying into shares.
Political concerns fading
Donald Trump’s proposals for tax cuts and a spending spree to boost the US economy gave some impetus to stock markets after his election, but his inability to pass key reforms – notably on healthcare – raised doubts about his other plans. The president’s belligerent rhetoric on most subjects also caused some concern. Recently, however, investors believe Trump may have started to understand the reality of his position, and be prepared to compromise to get deals done. Elsewhere Europe seems more stable since the election of Emmanuel Macron as president of France, and this weekend’s German poll is likely to see Angela Merkel retain her position as chancellor, which is expected to be welcomed by the markets.
North Korea tensions ease
Markets have tended to have a knee-jerk reaction to the recent missile tests by North Korea and the subsequent tensions between the state and the US. But any decline has quickly been recovered. Michael Hewson, chief market analyst at CMC Markets, said: “Tensions with North Korea are likely to remain a distraction, however markets appear to be becoming desensitised to them at this time, and short of shots being fired, these tensions are likely to have fairly short term and short lived effects.”
Central banks unlikely to rush to end low rates and QE
Markets have now been supported for a number of years by central banks providing cheap money and stimulus packages in the form of quantitative easing – or buying bonds off financial institutions in the hope they will invest the proceeds back into domestic economies. While they are beginning to turn off the money taps, they are taking a measured approach which has eased any investor fears of a sudden change of policy. The US Federal Reserve has raised interest rates three times since last December and while it is expected to leave things on hold at this week’s meeting, another increase in December could be on the cards. However, recent uncertain economic figures for the world’s largest economy, including retail sales, as well as the possible impact of the recent two storms means this is by no means certain. Meanwhile the Bank of England last week hinted it may increase rates in November, but while this gave an immediate boost to the pound, it only reverses the rise the Bank sanctioned in the immediate wake of the Brexit vote. The FTSE 100, which lost ground as the pound rose because so many of its constituents earn revenues in a foreign currency, is now recovering some of its losses. As for the European Central Bank, it has also hinted it will begin ending its bond buying programme, but it is in no rush to do so.
European economy recovering
One of the reasons the ECB can consider ending its stimulus measures is the economic picture in the eurozone. The financial crisis hit Europe hard, especially in the weaker economies such as Spain, Portugal and Greece, which is still in the midst of a bailout programme. But things have started to turn round, with the latest annualised growth numbers showing the eurozone growing at 2.3% compared with 2.2% for the US. Structural reforms, painful and slow as they may have been, are finally beginning to bear fruit.
China’s economy holding up
Despite fears of a slowdown in China, which would have a dramatic knock-on effect on world growth, the country’s economy – the world’s second largest – appears to be holding up. Granted, a number of indicators including industrial production and retail sales proved disappointing in August and below the previous month’s level. But analysts suggest the figures show that China was still growing at an annualised rate of about 5%, and the country’s currency remains strong.