RPT-GLOBAL MARKETS WEEKAHEAD-Goodbye QE and elections, hello G20

(Repeats, without changes, story first published on Friday)

By Jeremy Gaunt, European Investment Correspondent

LONDON, Nov 5 (BestGrowthStock) – Two down and one to go. Having
navigated past QE2 and the U.S. mid-term elections, investors
have another biggie in the coming week — a Group of 20 summit
meeting that threatens a global clash of currencies.

The result could have broad implications for the flow of
money into emerging markets and the returns on current holdings.

Not that, from a risk standpoint, you could tell in the
aftermath of the Federal Reserve’s decision to spend $600
billion in a quantitative easing (QE) asset-buying programme.

The Fed managed the neat trick of beating expectations but
not in a way that spooked the markets by implying that the U.S.
economy was in a worse state than feared.

So it was risk on, with MSCI’s all-country world stock index
(.MIWD00000PUS: ) rising to levels last seen before Lehman
Brothers collapsed, the seminal September 2008 event that turned
a bear market into a rout.

Emerging market debt spreads against U.S. Treasuries (11EMJ: )
shrank to their narrowest in three years.

The prospect of massive dollar-printing to fund the Fed
programme, however, hit the dollar. The week’s losses took the
U.S. currency’s depreciation against other majors (.DXY: ) to
nearly 15 percent since June, when global fears about euro zone
sovereign debt began to ease.

Which brings us back to the coming week’s G20 summit in
South Korea, where currency disagreements are likely to dominate
and the pre-meeting rhetoric has been far from diplomatic.

At its simplest, the row involves Washington accusing
Beijing of keeping the yuan low, versus a lot of other countries
angry about what they see as deliberate dollar devaluation
risking their export growth and fuelling domestic inflation.

Jeremy Armitage, global head of research at State Street
Global Markets, said the immediate risk for investors might be
for some emerging market economies to increase barriers to
investment flows to cool their currencies.

“I would expect to see more calls for capital controls,” he
said.

Longer-term, however, the fear is that the row will prompt a
protectionist trade war, which would have wide, negative
implications for many global investments.

In a joint report to the G20, the Organisation for Economic
Co-operation and Development and U.N trade body UNCTAD warned
that tensions over current account imbalances could slow
investment or degenerate into a protectionist spiral.

“Capital controls and regulations to buffer … economies
from foreign exchange volatility and capital flows … could
lead to a fragmentation of international capital markets along
national lines, and may be difficult to dismantle once in
place,” they said.

END-OF-YEAR RALLY

Whether any of this currency stress is enough to derail what
is shaping up to be a big end-of-year risk rally remains to be
seen. Heading into the new week, there is little evidence to
suggest anything more than the odd daily adjustment is coming.

There are underlying supports for the rally behind QE.

MSCI’s all-country index, for example, may have risen nearly
32 percent last year and be en route for 10 percent this year,
but some still think stocks are cheap.

Thomson Reuters Datastream shows one-year forward
price-to-earnings at 12.2 times versus a 10-year average of 15.

In a similar vein, Reuters asset allocation polls showed
that even though investors had moved into equities compared with
earlier months, they still had a lot of cash to pour in.

In addition to this, global manufacturing activity has
accelerated for the first time in six months, creating a
situation in which an already improving world economy has been
given a sharp monetary stimulus. [ID:nLDE6A115S]

U.S. jobs data added to the mix on Friday with a
better-than-expected rise in non-farm payrolls, the first
increase since May.

All this has left a lot of investors relatively bullish. Max
King, strategist and multi-asset portfolio manager at Investec
Asset Management, for example, sees three reasons why the end of
the equity rally is not nigh:

— too much money has been flooding into bonds;

— value, earnings, sentiment and issuance make equities a
long-term buying opportunity; and

— economic growth could turn out better than expected.

Even investors who withdrew from the market to avoid
volatility around the QE decision have a longer-term faith.

“Global equities are priced to deliver attractive returns,”
wealth managers at Ashburton said in a recent briefing.

EURO ZONE STRESS

There are always risks, of course, and the kind of debt
stress that sent global markets into conniptions earlier this
year has raised its head again.

Borrowing costs in the euro zone’s weaker economies rose
sharply in the past week with Ireland’s troubles particularly in
focus. Plans to cut spending and raise tax totalling 6 billion
euros in 2011 were seen as “unrealistic” by some market players.

There was a bit of a spill over into others such as Spain
and Italy, but the impact has mostly been contained.

The issue may have become more localised as a result of
international support mechanisms.

But the risk is there, so maybe it is two down, two to go.
(Additional reporting by Dominic Lau; Editing by Ruth
Pitchford)

RPT-GLOBAL MARKETS WEEKAHEAD-Goodbye QE and elections, hello G20