March of the Greenback

Confidence will do more for global growth than any government can. The frontpage headline of the FT today announced that US investors had put more money into European equities this year than at anytime since 1977.

Why are they doing that?

There are a number of reasons not least the fact that the US recovered its poise some time ago and investors will be feeling the US may be 'toppy', whilst the Fed has made rumblings about the tapering of QE.

The fundamental driving this European renaissance is long term value. Stocks are now valued at just over 11 times earnings (the amount of years taken to repay the purchase price by earnings received). The same measure in the US is nearly 15 times.

Is this new found confidence justified? It is if returns are sustained and there are no major negative event triggers. What could disappoint, or worse disrupt, is a return of the Eurozone woes, an escalation of the situation in Syria, or more fundamentally a realisation that Europe continues to be deep in debt and the debt mountain hasn't gone away.

On the upside Greece seems to be recovering from a near death experience economically speaking and Spain and Portugal whilst deeply troubled seem to be making slow progress or at least are not deteriorating further. Only Italy continues to lag.

The European purchasing managers index has been rising strongly, usually a good indicator of business confidence.

A wall of baby boomer pension fund money is desperately in need of a return and for the moment Europe looks like the place to be with some slowing in the emerging growth markets.

It is near impossible to call the turn in markets, but the amount of unremittingly good news on the economic front has encouraged some, including the UK Chancellor, to exhibit some cautious optimism and just a little hubris.

Are brighter times around the corner?  No one really knows, but for the moment the sun is definitely shining.   

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