World equity markets have continued to recover from their North Korea related setback in August/September.

All the data suggest that the outlook for the world economy is improving, and it is noteworthy that this is not only in the US and China, but in all major markets which is very encouraging. Many analysts still cite expensive valuations and an ‘under-risking’ of the potential for adverse economic or geopolitical surprises as a major concern, however supporters grow for the view that the continuing improvement in economic fundamentals provides a fair base for the markets at current prices.

In Australia, cheers were heard briefly in the final week of October and early November as the ASX200 Index nudged 6,000 points while the All Ordinaries Index actually closed above the magic mark for the first time since January 2008. Mixed conditions still prevail though: most business surveys are quite upbeat with NAB’s for example noting that conditions are well above their long run average and currently at the highest level since early 2008. At the same time though, the consumer side is not strong with confidence down and retail sales quite poor. Importantly the labour market is improving.

Globally, markets have recovered strongly since the worst of the North Korean tensions in early September. And, as with general economic data, the strength can be seen across most markets with US, European, Japanese, and emerging markets (Brazil, Russia, India, China) all performing quite strongly. The IMF is actually upgrading earlier growth forecasts and both business and consumer confidence is on the improve due in part at least to strengthening investment, trade, and industrial production figures.

Tax cuts in the US now appear back on track following the Senate’s acceptance of a budget bill on October 19th and this will already have been factored into the confidence surrounding US and global equities. But the overarching message is that the global economy is firming.

Challenges exist of course, as always, and are (i) the nagging feeling that US stock prices despite all the good news have simply run too hard for too long which could result in some sort of correction at the first sign of unexpected news, and (ii) and under appreciation of risk: geopolitical problems and policy mistakes by the US Fed or the ECB are highest on the worry list for fund managers.

My view? Australian shares have just muddled along for quite some time now having good bursts followed by short periods of high volatility. Some real evidence of sustainable improvement including wages growth needs to be seen (and bought into) before our market catches up. The good news for us is that stronger global conditions will help us directly and indirectly. While some global share indices are running high, we will be reliant on fund managers with a demonstrated skill for stock-picking. See video below: “Picking winners”

Sources: Morningstar Research; CBA Research & ComSec; Magellan.