Tunnels and Light Part 2

"Good news you don't see in the media."

In the previous issue written on 24 February, I listed many solid indicators suggesting stockmarkets were likely to rise imminently. The final paragraph read, "I appreciate we are sounding like a broken record, but if Governments and academics get their finger out, there should be a sudden change in sentiment and oversold shares will head back to fair value and beyond more quickly than you think."

Shares continued to fall until March. Since 9 March, the S&P 500 Index in the US is up 27%, the Nasdaq up 31.5% and since 2 March the stockmarket in Brazil is up 29%. So, is this the end of the second worst bear market of the last century or another false dawn?

Over the last six months or so since the panic falls last Autumn, we've consistently argued stockmarkets were going through a bottoming process, albeit volatile, which would eventually heal.

We continue to track the various indicators we've referred to in the past covering sentiment, levels of cash, valuation factors, volatility and risk factors. We believe the bottoming process is now completed and a new bull market has begun.

As is normally the case, stockmarkets are anticipating an improving economy. In the US, the Economic Cycle Research Institute, a leading independent forecast group with an excellent forecasting success rate, have noted significant improvements in economic indicators suggesting growth in economic activity will improve over the next few months.

You should remember recessions are self correcting mechanisms of business cycles. During each recession, consumers worry about jobs and postpone purchases of consumer goods. In turn, businesses cut back on productions and stock. In the US people are scrapping more cars each day than are being manufactured. More homes are falling down and being destroyed by fire and flood than are being replaced by new construction. These trends cannot continue.

At some point, consumers open their wallets and start spending again. Businesses will have to gear up to meet the outstanding demand from purchases that have been postponed over the last few months. And even a modest increase in demand will begin the next economic recovery phase. And we've seen a demand increase lately.

FED Chairman, Ben Bernanke, stated the US economy is beginning to show signs of improvement or 'green shoots' as he calls them. Leading economic indicators in the US have turned up from an extremely oversold position, an event that typically occurs around major stockmarket bottoms. Such indicators are helpful in identifying economic turning points and major stockmarket reversals.

Ned Davis Research has published a list of indicators showing global economies are stabilising. There are indeed positive signs not only in the US but also in the Euro Zone, the UK, Japan, Canada, Brazil and especially China.

So, if a new economic cycle is on the cards and stockmarkets are improving, it's worthwhile checking the particular sectors of improvement. Throughout history, times like this are accompanied with the out-performance of small and mid cap sectors of stockmarkets. They start to out-perform large cap shares. Also, growth starts to out-perform value, and emerging markets begin to out-perform the stockmarkets of developed countries. It is also a fact that sectors or shares hit the hardest bounce back the fastest. All these trends can be easily spotted.

Emerging markets are showing particular value for money these days. They took quite a tumble in the last year and a half. But this time round the falls were influenced by external factors, namely problems with US property, mortgages and banks, not problems experienced internally.

Emerging markets cover 85% of the World's population, 77% of the World's land area but currently only 23% of World GDP. But that's changing. It's estimated there's 3.8 billion middle class people in the World today. Thanks to the growth in emerging markets, the expectation is that number will double over the next 20 years.

In the last 24 hours, 180,000 people in developing countries have moved from the countryside to cities. The same will happen tomorrow, and every day for the next 30 years. This is the equivalent of creating one new New York city every two months.

Think of the demand for electricity, water, healthcare, schools, computers and jobs. These new city consumers will need dishwashers, microwaves, laptops, cell phones, cars, credit cards, medicine and every other product and service we take for granted in the West.

But don't expect to see any of this good news in the media. No doubt the swathe of bad news stories will continue. And now they've got another one to worry would-be investors - swine flu! Do remember the words of Sir John Templeton -

"BULL MARKETS CLIMB A WALL OF WORRY."

Alan Steel

Chairman

This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.