Outlook

Global sharemarkets have rallied by over 50% since their lows in early March as tentative signs of an economic recovery began to emerge.  In the United States,  73% of the S&P 500 companies that reported earnings in the June quarter exceeded analyst expectations. This does not justify the rally -  earnings for the S&P 500 were still down 27% on the prior year.  As the market is now factoring in growth more typical of a mid cycle recovery phase, we would have to suggest that global markets are overvalued. We say this on the proviso that markets are forward looking and should the global economic recovery gather more strength, it may be entirely justified in time. In the meantime we would argue that the economic headwinds (including weak consumer spending, a housing market that is still not showing any real signs of recovery, high unemployment and an enormous Government debt) remain uncomfortably strong.

Conclusion

We remain wary of the recent recovery on global sharemarkets given that economic fundamentals remain both weak and uncertain. As a result, we recommend an underweight exposure to international equities over the next quarter.