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ARTICLE · 26 APRIL 2011

Outlook – May 2011

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While global equities have exhibited admirable resilience – rebounding from the Japanese earthquake/tsunami induced sell off in mid March – they are struggling to find direction and remain below the recent high established in February.

United KingdomFinance and Banking
Smith & Williamson
Smith & Williamson

WORLD

Markets and uncertainty are uneasy companions

While global equities have exhibited admirable resilience – rebounding from the Japanese earthquake/tsunami induced sell off in mid March – they are struggling to find direction and remain below the recent high established in February.

The principal driver behind this resilience has been liquidity. At a corporate level, strong balance sheets and free cash flow generation have delivered a pick up in dividend payouts, stock buy backs and merger and acquisition activity. While these drivers should remain in place the markets are facing several headwinds over the summer months.

The first concerns the ending of QE2 in June. The expansion of the Fed's balance sheet has been highly correlated with equity market performance and also appears to have had strong connectivity to the recent rise in commodities. This obviously creates uncertainty over what will happen once the liquidity injections cease.

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