Increased political risk makes markets nervous

No reason to revise views.
After a good start of the new year, investors became hesitant. We hold on to our overweight equities versus bonds. Equities continue to be in a sweet spot. The main cause for the markets’ nervousness was the increase of political risks.

Investors reacted on negative news in the past days and ignored positive news, such as better than expected earnings figures of 80% of US companies so far. Also in Europe a lot of earnings reports exceeded expectations. The corporate news, which remains favourable, forms the basis of our overweight in equities. As we have said before, the driving force of equity markets will be earnings growth this year (we estimate earnings growth of around 30% in 2010). Based on valuations, global equities could rise approximately 20% from current levels until the end of 2010.

What is the negative news that makes investors nervous? The bad news is coming from China, Greece and the US. Furthermore, some economic data disappointed. On balance, recent figures show a mixed picture.