Investors kick off the final quarter of 2010 in a brighter mood as corporations and others facing the prospect of slow but stable growth seek to put a pile of unemployed cash to work before the year end.
The start of third-quarter earnings season, closely-watched U.S. jobs data, monetary policy decisions in the euro zone and Britain and an IMF meeting of policymakers provide the coming week's event risks which could further brighten investor morale.
World stocks on a MSCI measure gained 13.8 percent in the three months to end-September, making it the best quarter since Q3 in 2009. Almost all asset classes put in positive performances, with U.S., Asian and other emerging market stocks and commodities posting double-digit gains.
The MSCI index is finally up on the year after a few months of volatile but directionless trading. A Reuters poll also showed leading investment managers raised their equity holdings for the first time in seven months in September.
"Investors are gradually regaining faith in equities, more aware than ever that central banks will indeed do all that it takes," noted Bill O'Neill, EMEA chief investment officer of Merrill Lynch Wealth Management.
"Emerging market equities are favored by investors, who also want to see more deployment of capital by corporates in the developed world."
O'Neill said virtually all European equity sectors are holding excess cash relative to overall assets. Interest costs as a share of pre-tax earnings are also the lowest in decades.
He added assuming that corporates maintain a cash-to-asset ratio at the long-term average of 10 percent, they could have 230 billion euros or 4.6 percent of market capitalization ex- financials to play with.
One way to spend the cash pile is to buy other companies and expand their business. This is a trend that is gaining momentum and supporting risky assets.
Thomson Reuters data shows global mergers and acquisition activity announced so far this year totaled $1.678 trillion, surpassing volumes in the first nine months of 2009.
Q3 activity totaled $599 billion, up more than 25 percent on the year, making it the strongest quarter since Q3 2008.
Failing M&A, corporates can return cash to shareholders in the form of paying dividends, which are on the rise, or buy back shares, a factor that could boost their earnings per share and attract investors.
Credit Suisse reckons corporates' share buybacks would amount to 19 percent of market cap in the United States and 22 percent in Europe if all the firms with a net debt to EBITDA ratio, a gauge of corporate leverage, below 2 times were to relever to that level.
This would lead to a rise in earnings per share of 21 percent in Europe and 18 percent in the United States.
Q3 estimated growth in earnings per share for S&P 500 firms stands at 24 percent, with double-digit growth set to extend into the first quarter of 2011.
Alcoa releases its quarterly results on Thursday.
Central banks in the euro zone and Britain will ensure in the coming week that liquidity support is set to stay, underscoring a favorable environment for investors.
The European Central Bank is expected to extend lending support for banks, making it clear that interest rates remain on hold at a record low of 1 percent.
The chances of the Bank of England extending its quantitative easing scheme are on the rise.
A looming event risk on the horizon, which has been keeping investors and corporates on the sidelines, is U.S. mid-term elections. Less than five weeks away, the Nov. 2 elections could bring big losses for President Barack Obama's Democrats.
Investors should look forward to the elections removing uncertainty. In fact, U.S. stocks have gained a median 1.4 percent from September to Election Day and 14.7 percent in the six months following that day, according to JP Morgan. This positive return was seen 82 percent of the time since 1920.
"This could be because the mid-term elections produce wake-up calls for the administration, and push it towards more growth-friendly, if not more business-friendly policies," the bank said in a note to clients.
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