By Chris Shaw

Market conditions have been volatile in recent months, but as Russell Investments notes in its June quarter market commentary, such volatility is not unusual following a bear market. Russell does not believe this volatility signals the end of a recovery in the global economy.

Andrew Pease, Russell's senior investment strategist Asia Pacific, suggests the current position of the market, being the second year after a bear market, is typically characterised by high price to earnings ratios and the withdrawal of government stimulus measures. There is also usually an increase in market volatility as the issues that caused the downturn are not yet resolved.

This is in contrast to the first year after a downturn, which tends to contain lots of good news as governments implement stimulus measures and as share prices rise faster than earnings. The more challenging conditions then emerge in the second year, forcing investors to wait for evidence of an earnings recovery to justify market earnings multiples and for signs of how the issues of the downturn are being resolved.

This is what is happening now in Pease's view, while fears of a double-dip in the US, sovereign debt issues in Europe and a potential slowing in Chinese growth are also weighing on investor confidence levels and adding to volatility.

Such conditions should continue for a few months suggests Pease, though taking a more medium-term view he expects a sustained economic recovery and for sharemarkets to end the year higher than they are at present.

With respect to the current issues facing investors, Pease sees a double-dip in the US as unlikely as corporate cash flows remain healthy enough to offset weak housing indicators and a lack of jobs growth. With US companies recording good profits they are unlikely to reduce spending or employment levels and this should support economic growth in Pease's view.

In Europe, Pease takes the view the real test, being the ability of marginal banks to raise funds without government support, is yet to come, but the weak growth outlook for the region also means sharemarkets in Europe are again offering value. A weakening euro should also boost earnings in the region, according to Pease.

The Chinese economy is likely to slow but any weakening in growth is unlikely to be serious in Pease's view thanks to low levels of debt. He suggests another three or four years of banks increasing lending by the 30% increase recorded in 2009 would be needed before excessive or damaging debt levels were reached.

The news is not all good from an Australian perspective, as Pease suggests those assuming continued strong commodity growth are being overly optimistic. He sees less reasons to be confident in the Australian economy experiencing big gains in 2011 on the back of commodity prices.

In terms of investment strategy, Pease continues to favour global equities compared to Australian shares, reflecting both relative valuations and the fact the Australian market is heavily weighted to commodity prices.

In bonds it is the opposite, as Australian government bonds offering 10-year yields of 5.5% appear to offer better value than their global counterparts at present.

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