Global investors turn bullish again

Does anyone believe the global credit crunch has simply melted away?

GLOBAL 30 IN SEPTEMBER
BBC Global 30, last 12 months

The IMF warned in September that the mortgage crisis in the US has more shocks in store and will slow growth in the world's major economies; yet the stock markets appear oblivious to the warnings.

The BBC's Global 30 led the world's indices. It hit new highs two weeks ago, and then rose to a new all-time high of 6120.

The S&P 30, the Dow, Nasdaq and the FTSE trotted along behind, and by month's end were within a hair's breath of the highs they reached in July.

The only market that seems to have loitered behind the pack is Japan: of the seven fallers in the Global 30, four of them are Japanese - Mitsubishi, Canon, Tokyo Electric Power and East Japan Railways. The other three are from the US.

Strength in depth?

It's no accident the Global 30 has bounced back so quickly. The big cap stocks are well placed to weather economic storms - and calms - in the US.

"These big companies have been going into China, India, Brazil, Mexico and they have not just been selling to these countries but building up there and creating wealth," says Stephen Pope, Chief Global Market Strategist at Cantor Fitzgerald Europe.

WINNERS IN SEPTEMBER

• CNOOC (Red Chip), up 36.17%
• BHP Billiton, up 24.87%
• China Mobile (Red Chip), up 19.33%
• Nokia, up 13.92%
• Anglo American, up 13.39%

"Now they are very well placed to withstand economic shocks from the US. It's not exactly an economic decoupling of the rest of the world from the US, but when the US sneezes we don't catch a cold as we used to, though we may well shiver a little."

All the same, it was the lowering of interest rates in the US by half a percentage point that gave markets round the globe the fillip they needed. Surely, investors thought, the US economy will now motor along, and the economies and industries that feed it will prosper once more.

Red chip rush

Chief among these is China, and chief among the Chinese red chip stocks in Hong Kong is CNOOC, which has put in an extraordinary performance this year, and this last month in particular.

While Exxon has managed a 22% total return for shareholders in the last nine months, and BP a measly 3%, CNOOC has delivered 82%, The share price has risen 36.2% this last month alone.

The stock is a pure oil play, a production company with no refinery operations and therefore benefiting directly from the runaway oil price.

Now the company is going all out to boost its exploration and drilling businesses by some 17% next year.

Hang Seng soars

The Hong Kong market has had an exceptional month. Stocks across the board have been flying thanks to the speculation over the weight of cash that should surge over the border from the mainland as the government relaxes the existing curbs on cross-border investment.

The Hang Seng is up some 25% this year, a rise not seen since 1999 - which might in itself be an ominous sign, bearing in mind the 55% drop in the index from 2000 to 2002.

China Mobile, up 19.3%, has been the biggest contributor to the index's gain. Its latest results turned it into the most valuable company on the Hong Kong market, bigger than HSBC.

One US branding consultancy ranks it as the world's fifth most valuable brand and the only non-U.S. firm among the top five.

The fortunes of Anglo-American (up 13.3%) and BHP Billiton (up 24.9%) are also linked to China.

Demand for metals continues to outstrip supply, and prices keep rising - in particular copper, which has been pushed up by strikes by workers at mines in Mexico and Chile.

BHP is sitting on what seems to be a very big supply indeed. Analysts at JP Morgan said in September that its Olympic Dam mine could produce up to a million tonnes of copper a year, five times its current output, and keep producing for some 40 years.

Banking worries persist

There are, however, clouds within these silver linings - and one in particular still hovers over the banking sector.

In Japan, Mitsubishi UFJ shares are down 9.2%, as it cut its half-year profit forecast by 44% owing to a fall in the value of its investments in subsidiaries and affiliates - but not, it said, a result of exposure to the sub-prime mortgage market.

Citigroup was down 1.4% ahead of its third quarter results, and HSBC gained just 0.8% on the month.

Another cloud sits obstinately over Japan, and has its origins in the currency which has shown small lurches upwards against the dollar.

The greenback has been falling, along with US interest rates, against almost all the world's significant currencies.

LOSERS IN AUGUST

• Mitsubishi UFJ Financial, down 9.21%
• Canon, down 5.50%
• Tokyo Elec Power, down 4.82%
• Pfizer, down 2.63%
• East Japan Railway, down 2.06%

The yen alone has remained weak - just. The reason is the popularity of the "carry trade", whereby investors borrow at low interest rates in Japan, and invest in high-yielding currencies such as New Zealand and Australian dollars.

"The carry trade has distorted investment flows," says James Stewart, economist at Weavering Capital.

"Even modest investors are involved, and that sucks funds out of the stockmarket. One Japanese investor told me that Japan looks at the carry trade in the same way that western investors looked at the tech boom in the 1990s, as a win-win situation that you can't lose on. "But that's increasingly coming into question. Of late the carry trade has begun to look a little sickly."

Any hint of a strengthening yen damages the shares of the big exporters: Toyota was flat in September and Canon dropped 5.5%.

But perhaps most significant was the 2% fall in East Japan Railways' stock. It is not an exporter, and, a month, ago was on a roll thanks to its high yield and its immunity (or so it appeared) to global slowdowns.

Today, investors are chasing the big growth stocks in mining and commodities just as they were at the beginning of the year, as if the credit crunch had never happened.