TIME TO LOCK IN PROFITS?

Stock markets did well in April

Last month was a relatively good month for global equities as the reporting season in the US produced better-than-expected results. The conclusion of the war in Iraq also boosted investor sentiment, sending stock markets higher.

On the economic front, the picture was less sanguine. Despite the better-than-expected retail sales numbers in the US - which remains the key engine for world economic growth - monthly personal spending and the first quarter GDP numbers proved to be disappointing.

But stock markets, deprived of good news for many months and striving to look ahead, brushed aside the weaker economic data and rallied on the back of a good set of quarterly results from companies listed on Wall Street. Most companies in the S&P500 index have reported their results so far, including heavy weights like Citigroup, P&G, Pfizer, EMC, and Microsoft.

In terms of sector performance, Financials which were badly sold down in the first quarter of this year, were the clear winners. Stocks in the sector benefited significantly as markets rallied on expectations of an early economic recovery.

Overall for the month of April, cyclicals did well while defensive sectors like consumer staples and healthcare were laggards.

But will markets continue to do well?

At this juncture, we have turned more sanguine on consumer spending. Our conviction is based on the strong consumer loans growth and credit quality seen in the recent quarterly results of companies in the financial sector.

Before the first quarter reporting season, we were concerned about a double dip recession in the US, coming on the back of weak consumer spending. But we were pleasantly surprised and consequently, we are now less bearish the outlook for consumption.

Notwithstanding our improved reading on consumers, we think that the global economy will continue to be soft as companies are still cautious about corporate spending.

Also, it should be noted that while companies posted better-than-expected results in the first quarter, this emanated from cost cutting in many cases and higher investment income (which may not be sustainable). For instance, Apple, EMC & Sun Microsystems reported flat-to-weak operating income but this was offset by higher income from cash and bonds investment.

Opportunity to lock in profits

In summary, consumer sentiment is improving and the technicals for global equities looks moderately bullish. The swift US victory in Iraq and the containment of the SARS virus have given investor sentiment a boost. Companies have also met or exceeded analysts' expectations - although in many cases, earnings forecasts had been scaled down sharply due to the outbreak of war in Iraq and Sars.

Nevertheless, for markets to enjoy a sustained improvement, corporate spending needs to pick up. But it remains restrained in the near term. Consequently, markets may not be able to support much higher valuations until demand picks up and revenues recover.

As such, we think that the current rally provides an opportunity to locking in profits in the near term.