Investor demand rises along with stockpicking skills as strong companies flourish and global equities offer promise - despite the risks posed by austerity measures and slower growth.
As investors begin to sense that we are well into the mid-cycle phase of the market, they are likely to turn increasingly discriminatory. Companies that exhibit earnings growth and dividend growth are likely to be in demand and there is already evidence that intra-sector correlation and inter sector correlation is beginning to weaken (see graph, above). Stockpicking should begin to gain the upper hand.
There are still risks. Western economies may disappoint in terms of growth, austerity measures may lead to a renewed slowdown (although the high British borrowing figure for November suggests more talk than action) and inflation could dampen the mood in emerging markets.
Nevertheless, it is difficult not to feel that 2009 was the “big bottom” for equities. That does not preclude volatility and we can probably expect further violent corrections much as we had in January and summer of last year. The improvements that have been made in the corporate landscape, however, suggest 2011 starts on a more comfortable foundation than 2010. Wobbles there may be in the year ahead but I would be surprised if equities did not close 2011 having enjoyed another year of decent returns.