Analysis: Thin world markets rally may run longer, draw new cash

Tue Mar 6, 2012 4:05pm EST
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By Natsuko Waki

LONDON (Reuters) - After a full throttle rally since January, risky assets may be primed for a further, although less stellar, run higher in the coming months, pulling in new money under pressure to perform.

Average daily trading volumes in equities, bonds and commodities are down 16 percent this year, reflecting some investors' hesitation at joining the risk party fuelled by a wave of money printing by major central banks.

Furthermore, investment statistics show that thin volume rallies tend to outlive high volume stampedes.

World stocks, measured by MSCI .MIWD00000PUS, are up 10 percent this year, although the market is merely back at levels seen at the end of last July, before concerns about European sovereign debt and banks combined with fears of another U.S. recession to trigger a major sell-off.

"All the evidence we look at suggests a lot of long-term investors adopting more defensive positions have been hurt by the timing and extent of this rally. Volumes haven't been huge," said Philip Saunders, head of investment strategy at Investec.

"Nothing is going to go up in a straight line, but it's not that investors have suddenly bulled-up and positioning is at extreme. That means it's a reasonably encouraging environment. There is a lot of pressure for people to deliver returns."

One possible explanation for the thin volume is that investors may want to avoid a repeat of 2011.

At the start of last year, investors encouraged by the improving global economy went en mass into risky assets, only to see them reverse into the mid-year due to high oil prices, the euro debt crisis and concerns about a U.S. economic slowdown.   Continued...