Strong year on the stock exchanges

12.01.2010After the initial struggles, 2009 was very profitable on the global equity markets. The continuing economic recovery and increasing cash flows to the equity markets also support equities at the beginning of 2010.

From downturn to recovery

The developments were particularly dual on the stock exchanges in the past year. In the wake of the financial crisis at the end of 2008, equities were nose-diving in the first months of last year. Economic growth collapsed and global economy was expected to have fallen in a permanent weakness. The sentiment among investors was historically bleak as the markets did not believe that equities would return to a growth track for a long time.

The pitch-dark atmosphere of the beginning of the year changed, however, in the spring when the first budding signs of a turnaround in the economy were seen. The recovery was based on significant expansionary measures taken by governments and key rates lowered close to zero-level. In addition, corporate production, which in the winter had been exceptionally low, started to gain momentum when the inventories grew smaller. The investors’ confidence in renewed economic recovery was strengthened gradually, which led equities to a steep rise lasting the whole year.

Good year for equities

Equities rose from the lows seen in March by 70% in the US (S&P500). Even huger increases were experienced in other parts of the world. In Finland, the OMXH Cap index rose from the lowest readings by more than 70%, and the gain for the whole year was 40%. The year was the best in ten years on the Helsinki Stock Exchange. We have to bear in mind, though, that the previous year was one of the bleakest in history and equity prices are still 30% lower than the record levels in 2007.

The year starts in good spirits

The outlook for a continued rise in equity prices is promising at the beginning of the year. Economic recovery continues and companies’ earnings are expected to increase significantly thanks to strict cost discipline and increasing sales figures. The interest rate level remains low, although the central banks will gradually start tightening their monetary policies. Investors’ alternative returns from the fixed income market will thus remain low and this will attract investors’ money to the equity markets.

The outlook for the equity market is therefore still good in the short term. In January, equities are still boosted by institutional investors, who took home profits at the end of the year and are now starting their purchases again. After a strong start for the year, the outlook will become more uncertain towards the end of the year. Economic and monetary policies are exceptionally loose at the moment, and it is evident that they have to be tightened gradually, which will curb the steepest rises in equity prices. The gains on the equity markets will thus not be as high as last year, even though equities will remain on a growth track.