New quarter, old issues for investors around the world

Surprising as it may seem, investors are heading into a new quarter in relatively buoyant form, overcoming nerves about Japan’s disasters, rising oil prices and the EU’s delay in finalising its debt crisis package.

The first quarter was littered with weeks of “risk on, risk off” trading and a lot of uncertainty remains. But it is ending with remarkable resilience.

World stocks as measured by MSCI are above the levels they were at when Japan’s earthquake hit. Emerging market shares, losers for much of Q1, are nearly in the black for 2011 at eight-week highs.

The VIX volatility index is back down near levels not seen since before the Egyptian unrest began stirring the oil markets.

Reuters’ quarterly poll of almost 400 market analysts and economists, released in the past week, showed all 18 stock indexes covered in the survey finishing 2011 in positive territory compared with current levels.

Some, such as Hong Kong’s Hang Seng and Korea’s KOSPI, were seen gaining more than 17% by year-end.

Other gains were more modest, but nonetheless positive, such as 8% for the US S&P 500, more than 9% for France’s CAC 40 and a solid 13% plus for Germany’s DAX.

The primary driver, when everything else is stripped away, is confidence that the global economy is in pretty good condition and with it the corporate outlook.

It may not feel like it to millions of people in developed economies weighed down with debt and still recovering from recession but at an International Monetary Fund-projected 4.7%, global growth is set to rise well above the roughly 3.5% long-term average.

“There is still a lot of uncertainty... but the big thing that has allowed markets to climb this (recent) wall of worry is the economy,” said Valentijn van Nieuwenhuijzen, head of strategy at ING Investment Management.

Recovery, he said, had spread from just manufacturing and trade to services, making it broader and more “shock proof.”

Economic focus this week will, therefore, be on critical US, euro zone and Japanese employment reports while the impact on world business confidence from recent events will be monitored in global Purchasing Manager Indexes.

From a purely markets perspective, however, the past three months have thrown out some remarkable challenges —- none of which have actually gone away.

There is some interesting economic debate about whether the events were actually “Black Swans” that no one could predict or just far out tail risks.