Rise in equity markets based on sentiment rather than underlying fundamentals says top hedge fund manager

With most of the US economic data coming released in the last two weeks coming in at worse than expected levels, the strong upwards movements in the international equity markets are more a sign of a positive shift in sentiment rather than improvements in underlying fundamentals.

That is the view of Kevin Ewer, Portfolio Manager at Blue Ink Investments. “If you strip out the sentiment and focus only on the hard numbers, the probability is that we are seeing a bear market rally rather than a sustainable bull market rally.”

Figures released on Wednesday show that first quarter US GDP growth was down 6.1% annualised, significantly worse than the -4.7% that was expected and follows a 6.3% decline in the fourth quarter of 2008. Despite this, markets around the world continued their strong upward trend. US markets are up 9% in April, while European bourses have rallied by an average of more than 10%.

“People seem to be paying less attention to the bad news out there, such as the expected announcement that Chrysler will file for bankruptcy or the likelihood that as many as 6 of 19 major banks in the US will need to undertake capital raising exercises.”

The uncertainty in the system means the probability of a really strong bull market is small and I don’t think people should be betting the house right now. If it is a sustained bull market, there will be plenty of time to catch most of the upswing.”

Ewer says that locally, there does not seem to be as much sentiment driven interpretation of economic data. Inflation numbers released on 29 April were in line with expectations, as was the 1% cut in interest rates.

“These numbers probably justify the 3% rally in the local markets in April, which would have been far greater if not for the 12% rally in the Rand from R9.50/$ on 31 March to 8.46/$ by the end April.”

Ewer believes that while the local equity markets are probably looking quite cheap right now, the high amount of uncertainty on international markets, from which the local bourse often takes its cue, means that a neutral strategy is the sensible play for the forseeable future.