Page last updated at 09:05 GMT, Friday, 2 October 2009 10:05 UK

Are markets reaching bubble proportions?

At the end of each month, BBC World News business presenter Jamie Robertson takes a look at the world's major stock markets. This month he considers how long the rally in global markets can continue.


Bellboys
'The bellboys are handing out stock tips in the lifts'

So how long can this go on for? As the markets race ahead, and investors bob along with them through the rapids, the sound of the waterfall ahead gets louder and louder, but no one knows exactly around which bend it will appear.

At the moment investors are driven by a frenetic desire to catch the bull market which many ruefully admit to having missed out on.

Others agonise over when the fall will come so they can jump aboard immediately afterwards, safe in the knowledge that the big drop is behind them.

There are plenty of institutional investors sitting on the sidelines. But there is a weight of money in these markets desperate for returns in a world of negligible interest rates.

Research group Compeer reported that the number of deals placed through retail stockbrokers rose to more than four million in the three months to June, a number surpassed only in spring 2000.

For many that is a sign that a market is reaching bubble proportions, the point at which, in the parlance of 1929, the bellboys are handing out stock tips in the lifts.

Economic optimism

Can we really have reached such a point so soon after the market hit rock bottom?

Yes, we can. The bear market of the 1990s in Japan was marked by many such moments. The crash of 1929 was followed by a 48% rally over six months - followed by another precipitous crash.

Angela Merkel and Nicolas Sarkozy
Germany and France have been celebrating exiting recession

That bear market rally was fuelled by economic optimism at the very top. US Treasury Secretary Andrew Mellon said in December 1929: "I see nothing in the present situation that is either menacing or warrants pessimism."

Today's rally can hardly be based on ignorance of the economic facts. Scarcely a day goes by without an economist/politician/journalist explaining how weak the global economy is. And yet the rally continues.

Stimulus packages

Much of this can be put down to the stimulus packages, which have been without question enormously successful in preventing, easing, or perhaps just deferring recession.

Withdrawing those packages will require all the delicacy and finesse of extracting a royal flush from the bottom of a house of cards - which is why the G20 was so keen to assure the markets that nothing gets withdrawn until the recovery is well in place.

That may be some time. The Europeans have been celebrating the fact that Germany and France are out of recession. Yet there are some serious reasons to be concerned about future growth, and most of them lie to the east.

Germany may well not be in recession but the nature of the recovery and the scant prospects for its corporate base hardly justify a 34% gain in the Dax since March

Six months ago there was a real fear that the Baltic states, Ukraine and several of their neighbours could go into meltdown. The International Monetary Fund and the European Central Bank stepped in with ready cash and disaster was averted.

The stock market response to the crisis was justified. The Ukrainian market, for example, fell 83% from its peak. The response to the recovery (in Ukraine's case a 183% rise from the trough in March), is less so. Then again one expects such volatility from emerging markets.

What one expects less is such a strong rebound in markets that have extensive links with these fragile states. The IMF pointed out this week that European banks have written down only 40% of their bad loans. That failure to recognise dodgy debt lies largely in continental Europe, among banks that have heavy exposure to Eastern European economies.

Drop in lending

"Eastern Europe is in the throes of a very deep downturn, and European banks are still exposed to them, even if the loan losses are related to deep recession rather than to a crisis, as was feared six months ago," says Ken Wattret, Europe economist at BNP Paribas in London.

Wattrett points out that even if banks in Germany, Austria and Italy stay solvent, lending to the corporate sector across Europe is down 6% year-on-year and there is every indication that it will be reduced still further.

And there's more. For the last decade or so Eastern European economies have provided a ready and growing market for German goods.

"That's not coming back," says Wattret, "not for a long time. And that means one of the key drivers of the European economy, the German exports to the east, is severely curtailed."

Germany may well not be in recession but the nature of the recovery and the scant prospects for its corporate base hardly justify a 34% gain in the Dax since March, while a 43% gain in the Italian MIB Index, and a 50% gain in the Austrian market are starting to starting to take on a distinctly bubbly appearance.



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