Progress and the outlook for investors

Most of the stats and the market action continue to indicate that the current phase of global monetary easing is passing through to the economy and markets.

The evidence for this is provided by up-to-date manufacturing surveys across a number of economies which have recently ticked up, and economic statistics have been coming in stronger than consensus estimates.

There have also been the moves up in stock markets, and the partial retreat of credit spreads.In addition, currency markets and funding spreads indicate an improvement in global dollar liquidity

Such improvements do not mean that developed economies are ‘back to normal’. A key challenge is that the de-leveraging process has led to an extreme reliance on government monetary and fiscal support.  Last year, when governments pulled back support, economies went into retreat.  The response from central bankers to this economic weakness was the extra liquidity, which is now passing through the system.

Wednesday’s US ISM report, which came in at 54.1 after 53.1 last month is consistent with the tide of better news. Importantly for the US economy, both the orders and export components of the survey were well up. The ISM numbers suggest that there’s a chance that production growth will this time be sustained.

This picture of improving prospects is matched by the global Purchasing Manager surveys out on Wednesday. Improvements are small, but they are widespread and consistent with demand trends in commodity markets. But to put this in context, developed world production numbers look to be years away from prior peaks, so we are seeing progress from a low base. Equally and in contrast, production in the emerging world is above pre-Crisis levels, and with improving productivity and lower debt levels, emerging markets should still set the pace for some time to come.

This leaves something of an investment quandary. Ordinarily confirmation of easy money conditions should be expected to be supportive of risk assets. But if the US economy does not sustain its recent progress, such that the Federal Reserve Board decides that it will commence a new round of quantitative easing, so called QE3, we should expect stocks to perform poorly – simply because the Fed would be seen to be confirming that the outlook’s worse than expected.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla