After hitting a low of around 4800 in July, the FTSE 100, along with most other markets, has been moving up strongly, climbing the proverbial wall of worry.
Even September and October, months notorious for their volatility, treated investors well. With such a difficult economic backdrop, I'm sure many are questioning why this should be. Yet most of the problems we see are to do with government and consumer debt.
True, these are worrying issues, but, broadly speaking, companies are in good health having started putting their houses in order almost as soon as the financial crisis hit. Not so governments, some of whom are still procrastinating and inclined to spend more money rather than less. Consumers meanwhile have been gradually getting the message and paying back debt.
One of the main reasons I believe stock markets have been moving up is the possibility of fresh quantitative easing, or QE2 as it has become known. Essentially, quantitative easing results in new money being created and being allowed to circulate in the economy. The idea is to give economic growth a kick-start. I have no particular view whether this is the right or wrong action, but it could produce some interesting consequences.
Given the severity of the financial crisis, it is hardly surprising to see a period of weak growth. It is only natural, and I expect it to continue. Yet politicians and central banks on both sides of the Atlantic seem loath to accept this and are looking around for a cure for the problem. Unfortunately QE is a medicine that hasn't been tested on its patient before. It is debatable whether it will work in the way it is intended, or whether it will produce different, entirely unintended, effects.
It could be, for instance, that it has an impact on financial assets, driving up prices, without any real effect on the real economy. In particular, I suspect QE could be a shot in the arm for emerging markets rather than for those economies implementing QE.
This should not come as a surprise. Money, like water, flows along the path of least resistance. If you can find where that is, you have found your pot of gold. And,if you'll pardon the pun, gold is surely one of those places at the moment, along with other commodities and emerging market equities. These are seen as the most exciting, high-growth areas, so investors have already been turning their backs on traditional Western markets to pour money into these areas.
Financial commentators have picked up on this and I am increasingly seeing the word "bubble" used in conjunction with gold and various emerging economies. I have no doubt that some assets look overbought, but I think calling it a bubble is far too premature.
Gold is rising because of the debasement of currencies caused by QE, and with interest rates so low there is little opportunity cost incurred by holding it. If it doubles I would probably change my mind, but for now I see the price movement as rational rather than irrational. Meanwhile, emerging market equities, whilst not cheap, don't look particularly overvalued.
Next week will see the US Federal Reserve decide on QE2, and markets could have a setback if they are disappointed by the outcome. A well-known market expression goes, "it is always better to travel than to arrive," and I feel much of the QE effect must have been discounted already.
If we do see a correction in the markets I would be a buyer of the dips, particularly in emerging markets and gold. I feel there is at least one more leg to go in this market rally. So I am still a fan of Aberdeen Emerging Markets, BlackRock Gold & General, Neptune Russia & Greater Russia and First State Latin America. Investors will need to keep an eye on valuations and be prepared to jump ship, but in the meantime I think this is a "buy in the dips" market.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent