BASEL (Thomson Financial) - The Bank for International Settlements said the rebound in share prices from the downturn of late February, particularly in emerging markets, suggests that investors' appetite for risk remains strong.
'The quick recovery of emerging market asset prices after the sell-off suggested that the willingness of investors to take on emerging market risk remained robust, and that market confidence was not easily dislodged, even by sharp moves in asset prices,' the BIS said in its quarterly review.
It said investors' outlook for emerging markets remained upbeat, as their economic performance continued to be positive and fiscal positions remained strong.
But it added: 'While better economic performance contributed to the favourable developments in emerging markets over the past couple of months, investors' high risk tolerance also appeared to play an important role.'
Spreads on emerging market debt also tightened further, it noted.
In particular, investors remain confident in the Chinese economy, despite the sharp fall in the Shanghai stock market which triggered the brief global downturn of late February, it said.
Although the Shanghai market continues to show signs of overvaluation, investors' appetite for the market shows no signs of abating, it said.
'The introduction in mid-May of measures aimed at cooling the economy -- including a hike in interest rates, increased reserve requirements and a widening of the currency band - did little to dent the confidence of investors, who instead pushed the Shanghai stock index up to new all-time highs in the second half of May,' the BIS said.
US and European equity markets also rebounded quickly from the February sell-off and had more than recouped their losses and reached new six-year highs by end-May.
But valuations in these markets are still much lower than they were in the rally that preceded the bursting of the dotcom bubble in 2000.
Prior to the collapse in equity prices in 2000, price/earnings ratios for companies in both the S&P 500 and the DJ EURO STOXX had risen to well above 20.
'P/E ratios have risen nowhere near as much during the recent rally, as generally strong earnings growth since 2005 has kept pace with the rise in equity prices,' it said.
The equities rally has also been supported by the global boom in merger and acquisition and leveraged buyout activity, it said.
The total value of announced M&A deals in the US reached 1.1 trln usd in Jan-May 2007, the strongest five-month period on record. Activity in Europe was also strong during this period, at just over 1 trln usd, with particularly heavy activity in the banking and financial services sectors, it said. steve.whitehouse@thomson.com sw/wj COPYRIGHT Copyright AFX News Limited 2007. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News.