Monetary policy

To those who have seen headlines over new record highs in equity markets or who mainly judge equity market valuations on the back of price-earnings or earnings yields it might sound strange to argue that equities are attractive...

For nearly one month, the renewed strains experienced by US long rates following the good October employment data (despite the shutdown) have triggered a new correction on the part of emerging currencies (even though they have stabilised somewhat of late).

The rise in the yield of the 10-year TNote has been impressive since the start of May, up from 1.60% to 2.90%, its highest level since July 2011 (TNote contract has shed around 6%). The steepening of the US sovereign yield curve has been just as impressive, as the 10-2Y spread has widened to 250bp from around 140bp at the start of May.

“Which country will be the new China? Which country is ready to dominate the world economy? Not India, not Brazil, nor any other rapidly expanding emerging country, says Henk Grootveld. No, it is…the US.”

Past results do not guarantee future performance. However, they certainly set the tone for predictions of it. A year ago, the outlook statements for this year’s equity performance were rather cautious, with forecasters extrapolating the poor trend of 2011. However, 2012 proved to be a good year and, unsurprisingly, the broker consensus is positive for 2013. Is this justified?