Surging stock markets highlight 'disconnect'

30/12/2010 00:00 AST

What do you get when the global economy is marked by high unemployment, creeping inflation and fears about sovereign defaults?

The answer at the moment is surging stock markets.

Asian and European stock indexes were at or near 30-month highs yesterday, and even the Dubai Financial Market posted its strongest gains in four weeks.

There is currently a "disconnect between the corporate world and governments", said James Thomas, the regional director with Acuma Wealth Management in Dubai.

"Companies have spent the last two years building balance sheets and cutting costs to the bone so they are able to produce good numbers," he said. "On the flip side, you've got governments up to their eyeballs in debt."

In his view, which is shared by many experts, the disparity is not sustainable in the long term.

But investors for now continue to pile money into stocks on the back of strong corporate earnings.

Asian stocks climbed to a 30-month high for the second straight day, as Australian mining stocks and Chinese oil producers were buoyed by higher commodity prices. Crude for February delivery slipped slightly but remained above $90 per barrel.

The MSCI Asia Pacific Index climbed 0.7 per cent and is now ahead 13 per cent for the year. In Europe, shares were near their highest levels since September 2008.

"Our sense is that the pace of growth in the US industrial economy is accelerating and that corporate confidence is rising," said Andrew Dalton, the chief investment officer at Dalton Strategic Partnership in London. "Equity markets remain relatively cheap."

US stocks also rose in early trading and are on pace for their best December performance since 1991.

In Dubai, which has underperformed global markets this year, shares gained 1.4 per cent. The Abu Dhabi Securities Exchange General Index was essentially flat.

Mr Thomas said the US and several European governments had been effective at "hiding the fundamental issues" with their economies, which, if true, could result in volatility ahead for those investors who have enjoyed a good ride of late.

The National